7 facts to know about deducting interest on student loans

Note that the student loan situation has changed due to the impact of the coronavirus outbreak and the relief efforts of the government, student loan lenders and others. Check out our Student Loans Hero Coronavirus Information Center for news and additional details.

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While no one likes paying interest on student loans, it comes with a silver lining: you might be able to claim an interest deduction on student loans of up to $ 2,500 on your loans. taxes. This deduction could save you a lot of money, but you need to know how the deduction works so that you can claim it properly.

Here are seven key facts to know when claiming the student loan interest deduction for your taxes.

1. Not all loans are eligible for the interest deduction on student loans
2. The interest deduction on student loans allows you to deduct up to $ 2,500
3. You don’t need to itemize to take advantage of an interest deduction on student loans
4. The deduction could save you hundreds
5. There are income limits
6. You are not eligible if you are a dependent or if you are filing taxes as “married, filing separately”
7. Your student loan manager will send you a form to help you claim the deduction.

1. Not all loans are eligible for the interest deduction on student loans

Student loan interest deduction may be available to you if you meet certain key criteria. According to IRS, the interest on the student loan is tax deductible if:

• You took out the student loan for yourself, your spouse, or any dependents when you borrowed. The deduction is available for federal loans and private loans.
• The loan was taken out to cover tuition fees during one school year. You can only deduct interest if the student loan covered expenses related to school, including tuition or room and board. If you financed personal expenses that were not directly related to your education, such as buying a car while you were in school, you are supposed to reduce your deduction.
• You were legally obligated to pay the interest on the student loan. If you pay off your child’s student loan but don’t have to pay the interest, you can’t deduct it.

2. The interest deduction on student loans allows you to deduct up to $ 2,500

If you meet all of the eligibility criteria, the maximum amount of interest you can deduct per year is $ 2,500. If you paid more than this amount, you cannot deduct the additional interest paid.

This is a deduction, not a credit. This means that you subtract the amount of deductible interest from your taxable income. For example, if you had $ 45,000 in taxable income last year and paid the full $ 2,500 in deductible student loan interest, your deduction would reduce your taxable income to $ 42,500.

Credits, on the other hand, reduce the amount of taxes you pay. If you owed $ 6,750 in taxes and had a credit of $ 1,000, you only owed $ 5,750.

Deductions are not worth as much as credits, but they can still save you money. If you are still in school, you may be eligible for tax credits such as the American Opportunity Tax Credit. However, there are no tax credits for student loan interest; the deduction is your only option to save on your taxes based on your student loan repayment.

3. You don’t need to itemize to take advantage of an interest deduction on student loans

The student loan interest deduction is an over-limit tax deduction, which means the deduction directly reduces your adjusted gross income. You enter the amount of interest deductible, and this reduces your adjusted gross income.

Being able to claim the deduction without itemizing could be a big advantage. If using the standard deduction is right for you, you don’t have to worry about missing the student loan deduction.

4. The deduction could save you hundreds

The exact amount that the deduction will save you will vary depending on your tax bracket. The the value of the student loan interest deduction will change if your tax bracket changes.

You can estimate the value of your deduction by multiplying your deductible interest by your tax bracket. For example, if you are in the 25% tax bracket and have a deduction of $ 2,500, your deduction would be worth $ 625 ($ 2,500 x 0.25).

Your deduction reduces the amount of income taxed at your highest marginal rate, so this calculation works in most situations. This is because the deduction means that you have less income taxed at the higher rate you pay.

If your deduction takes you back to a lower tax bracket, the math is more complicated because you avoid taxes on a portion of the income taxed at your highest marginal rate, as well as on a portion of the income taxed at the lower rate.

To make it easier to estimate the value of your deduction, you can use our student loan interest deduction calculator. You will need to enter details about your income, your tax reporting status, whether you have been declared a dependent, and the amount of student loan interest paid.

5. There are income limits

The student loan interest deduction is phased out for higher income, so you won’t be able to claim the deduction if you make too much money.

• If you earn more than $ 85,000 as a sole filer, you cannot claim the interest deduction on student loans.
• If you earn more than $ 170,000 if “married, file jointly,” you are not eligible for the interest deduction on student loans.

6. You are not eligible if you are a dependent or if you are filing taxes as “married, filing separately”

There are a few final key eligibility criteria to be met, even if you meet other conditions in terms of income and having a qualifying loan. To be entitled to the deduction:

• You must not be declared as a dependent on someone else’s tax return. Parents often state that the children are dependent.
• You do not have to report your taxes as “married, file separately”.

If you’re a dependent or married, but filing your taxes separately, you’re out of luck – there’s nothing you can do to get the student loan interest deducted.

7. Your student loan manager will send you a form to help you claim the deduction.

If you plan to claim the interest deduction on student loans, you don’t have to worry about tracking interest throughout the year. Your student loan manager will send you a 1098-E form showing you the total amount of interest you have paid.

Just take the information from the box that says “Student loan interest received by lender” and enter that number when you file your taxes. If you are using an online program to do your taxes, the program will ask you to provide the necessary information. That way, you can effortlessly claim your student loan interest deduction and get tax relief in return for all that interest you owe.

To learn more about how interest accrues on your debt, check out this guide on how student loan interest works. And to speed up your repayment, check out our guide to paying off your student loans faster.

Rebecca Safier contributed to this article.

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