Millions of Americans are drowning in student loan debt. There are more than 44 million student loan borrowers. They each owe on average $37,172.
That’s the bad news. But there is some good news too: You may be able to deduct your student loan interest from your income taxes.
What is student loan interest?
Everyone who takes out a student loan must pay interest on the amount borrowed to the lender. The interest you pay is a percentage of the amount borrowed. For example, if you borrow $10,000 at a 6.8 percent interest rate, you’ll owe $680 in interest each year.
Interest rates on student loans vary according to the type and date of the loan. They range from less than 4 to 8.5 percent.
You ordinarily must start paying interest on your student loans six months after you graduate, drop out of school, or attend less than half-time. But in some cases, you can get your loan payments deferred. For example, you can get a deferment up to three years if you’re unemployed. For more on deferments, visit https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance.
What is the student loan interest deduction?
You can’t deduct interest you pay for personal loans, other than home mortgage interest. But there is a special rule for student loans. If you qualify, you can deduct up to $2,500 in student loan interest each year from your income taxes.
The student loan interest deduction is an “above the line” deduction. This means you can deduct it whether or not you itemize your personal deductions. This makes it a particularly valuable deduction.
Which student loans qualify for the deduction?
You can only deduct interest you pay on student loans that are for:
- Your spouse, or
- Someone who was your dependent when you took out the loan.
Such dependents include your child under age 24 who you support or another relative you support who has an income under $4,150.
You or the other student must use the loan to attend college or another postsecondary educational institution at least half-time. The program must lead to a degree, certificate, or other educational credentials. You can attend virtually any accredited college, vocational school, or other postsecondary institution and qualify.
You must use the money to pay for tuition, fees, room and board, books and other supplies, and other necessary expenses.
By the way, you don’t get this deduction if you borrow the money from a relative. This is so even if you pay interest on the loan.
Also, you can’t claim this deduction if you’re claimed as a dependent on someone else’s tax return. For example, you don’t get the deduction if your parents claim you as a dependent.
If you’re married, you must file a joint return to get this deduction.
How much student loan interest can you deduct?
The maximum student loan interest deduction is $2,500 per year. But the deduction phases out for higher income borrowers. If your income is too high, you get no deduction at all.
Single taxpayers: If you’re a single taxpayer or head of household, the phase-out begins if your adjusted gross income is over $65,000. You lose the deduction completely if your AGI is over $80,000.
Married taxpayers: If you’re married filing jointly, your deduction phases out if your AGI is over $135,000. You lose the deduction completely if your AGI is over $165,000.
|Filing Status||AGI||Student Loan Deduction|
|Single, head of household||up to $65,000||no phase-out|
|$65,001 to $80,000||deduction reduced by phase-out|
|$80,000 or more||deduction eliminated|
|Married, filing jointly||up to $135,000||no phase-out|
|135,001 to $165,000||deduction reduced by phase-out|
|$165,000 or more||deduction eliminated|
For example, if you’re married and your AGI is $150,000, your deduction is cut by 50%. There are online calculators that show your deduction if your AGI is in the phase-out range.
How do you know how much student loan interest is paid each year?
It’s important to know how much student loan interest you pay each year. Fortunately, student loan servicers make this fairly easy.
If you pay $600 or more in student loan interest, your loan servicer should send you Form 1098-E, Student Loan Interest Statement. Box 1 of the form will show how much interest you paid during the year. You should receive the form by January 31.
You may receive more than one Form 1098-E if you have more than one lender. Some lenders send them electronically. Some send them by postal mail.
You don’t need to receive Form 1098-E to claim the student loan interest deduction. On your account statement is the total amount of interest that you paid. Alternatively, you can contact your student loan servicer to get the amount of interest paid the past year.
If you don’t know which student loan servicer to contact, visit www.nslds.ed.gov. You can also the call the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243).
Amounts to include as interest
You can deduct not only the interest you pay a lender but other fees as well. These include loan origination fees – a one-time service fee charged by the lender when you take out the loan.
A loan origination fee treated as interest accrues over the life of the loan. The lender lists them on Form 1098-E.
If someone else pays your student loans, can you claim this deduction?
Yes. The IRS says that if you’re legally obligated to make interest payments on student loans and someone else does it for you, you are treated as received the payments from the other person. You are then treated as paying the interest yourself. For example, if your parents pay your student loan interest this year, you may still claim the deduction.
How do you claim the student loan interest payment deduction?
You claim the deduction as an adjustment to income on your Form 1040. This means you can claim the deduction whether or not you itemize your personal deductions. Enter the amount on Schedule 1, Form 1040, line 33.
For more details on the student loan interest deduction, refer to IRS Publication 970, Tax Benefits for Education.
Learn more about reducing your income taxes if you qualify for the lifetime learning credit.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.