- Student Loan Interest Tax Deductible
- Are My Student Loan Payments Tax Deductible?
- What Are Tax Deductions?
Student Loan Interest Tax Deductible – Do you have student loans? The IRS could give you a tax break. See if you qualify for the student loan interest deduction and learn about other student tax deductions.
Tax season brings mixed feelings. You may get a refund, but you may also be hit with a tax bill from the IRS. Not fun – especially if a good chunk of your budget goes to student loan payments.
Student Loan Interest Tax Deductible
That’s right: You can write off your student loan interest on your taxes every year.
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In this article, we’ll explain the student loan deduction and help you see if you might be eligible. Then we’ll cover some other student tax breaks to check out and offer some non-tax tips for reducing your debt load and student loan payments during and after college.
According to the Education Data Initiative, the average student loan repayment term is 20 years, and borrowers accrue $26,000 in total interest on average over that time.
The IRS recognizes that $26,000 is a lot of money, and they also realize that you are borrowing to acquire skills and education that will benefit you and the economy. So they created the student loan interest deduction, a tax break that allows you to deduct interest paid on student loans.
The student loan interest deduction lets you deduct up to $2,500 of interest you paid each year on eligible student loans. If you paid less than $2,500, you can only deduct the amount you paid.
Are My Student Loan Payments Tax Deductible?
On the other hand, if you only paid $1,000 in eligible interest, you can only deduct $1,000 from your income.
Student loan interest is considered an adjustment to your income, also known as an “above the line” deduction. That means you don’t have to itemize your deductions to claim them as you would with many other types of tax deductions.
Also, it is a deduction, not a credit. That means it reduces your taxable income. It does not immediately reduce your taxes dollar-for-dollar like a tax credit.
For example, imagine you earned $50,000 this year and paid $2,500 in eligible student loan interest. You don’t reduce the taxes you owe by $2,500. Instead, you reduce your income—$50,000—by $2,500 to arrive at $47,500.
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Both federal and private loans are good for this deduction, as long as you meet the above requirements.
In addition, this deduction has income limits if you earn a lot, and these limits can change every year for inflation. The IRS looks at your modified adjusted gross income, or MAGI, to see if you’re earning too much.
The IRS has a worksheet in their publication 970 that walks you through the MAGI calculation. Many tax software programs do the math for you too.
If you’re eligible and paid more than $600 in student loan interest during the tax year, your loan servicer will give you a tax form called a 1098-E.
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This number goes on Schedule 1, line 21, where it says student loan interest. It is then used with all the other lines on that worksheet to figure out your total adjustments to income that are given on your 1040 tax return form.
Now, if you’ve paid less than $600, you may still be eligible – you’ll need to contact your loan servicer to find out what interest you’ve paid.
If you have multiple lenders, you will receive a 1098-E from each of which you have paid at least $600 in loan interest.
The student loan interest deduction can be a lifesaver early in your post-college life, but it’s not the only tax break the IRS offers to recent graduates.
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Deductions, credits, and savings accounts are available before, during, and after college to cut your tax bill and help you offset your college expenses. Here are a few to check out:
The American Opportunity Tax Credit lets you or your parents claim up to $2,500 in tax credits for qualified education expenses, such as tuition and fees.
Because it’s a credit, it immediately reduces your taxes dollar-for-dollar. It doesn’t just reduce your income like a deduction.
You can not depend on a return from someone else, like your parents. If your parents claim you, they may be able to take the credit.
Topic · Student Loan Interest · Change.org
Also, you cannot claim this credit by using the same education expenses to claim another credit, such as the Lifetime Learning Credit.
Your school will send you a Form 1098-T with information about the tuition you paid. You can use this form to calculate your AOTC.
The Lifetime Learning Credit lets you claim up to $2,000 in tax credits per year. Unlike the AOTC, the LLC does not limit the number of years you can claim the credit. This means that you can potentially use this for graduate school after completing your undergraduate career.
The requirements are similar to the AOTC, although the income limits are lower. Again, your parents can claim it instead of you if you are listed as a dependent.
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College savings plans are tax-advantaged accounts that each you and your parents set aside money for college. You can invest the money in the market, and if it grows, you are not taxed on it.
Each state has its own 529 plan, so you’ll need to check with your state to learn the rules.
That said, these plans don’t let you choose your investments — they all go into a fund run by your state — but contributions could be deducted from the contributor’s state tax returns.
However, some states don’t have a state income tax, or they don’t let you or your parents deduct 529 contributions. In that case, a Coverdell account may work better.
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These don’t let you deduct contributions, which is good if you live in a state with no income tax or deductible 529 contributions. But with Coverdell accounts, you can choose what you invest in.
Regardless of the account you choose, both let you take money out tax-free if you use the money for qualified educational expenses. This generally includes tuition and fees, room and board, and books and supplies.
The child is considered the owner of the account, but only the custodian is allowed to make any actions on the account or choose investments. Plus, family and friends can donate money to the account for the child to save.
When the child turns 18, the account is transferred to them. They can now legally manage their investments.
Federal Tax Benefits For Higher Education
What’s great about these accounts is some of the income or gains are taxed at the child’s rate, which is usually much lower than their parent or guardian’s. That can save your family a few dollars on taxes and help prepare their child for a college education without the guilt.
Tax credits aren’t the only way to save money on interest and get out of student loan debt faster. Try the following programs and tips to get more breaks on your student loan payments.
If you are still in school, prioritize non-debt financial aid first because you do not have to pay back these types of aid.
Grants are a good place to start. These are need-based, meaning they are awarded based on the winner’s ability to pay for school.
Can I Get A Student Loan Tax Deduction?
Then look for scholarships. These are usually based on merit, helping you fill the gap if grants don’t get you all the help you need.
You can find many scholarships online and through your school’s financial aid office. Some require essays, while others only ask you to fill out a short form.
Loan forgiveness programs erase your loans completely if you have qualifying federal loans and make your loan payments on time for a certain number of years and meet other requirements.
The Public Service Loan Forgiveness Program is one of the most well-known. It forgives the loans of many government workers, nonprofit employees, public safety professionals, and educators if they meet specific requirements.
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If your monthly federal loan payments are high compared to your income, income-driven repayment plans can help. There are 4 types:
These adjust your payment based on your income and family size so you can continue to make required payments on time.
Any type of income driven plan also offers loan forgiveness after making timely payments for 20-25 years, depending on the plan and what you used the loans for.
Refinancing involves paying off an existing loan with a new loan that has a lower interest rate, which lowers your monthly payment. This can be a great option if you have private loans as these loans cannot be forgiven.
Student Loan Interest Deduction Worksheet—line 33
For example, if you have $20,000 in student loans at 5% interest, refinancing might involve getting a $20,000 loan at 3.5% to pay off the old loan. You are still $20,000 in debt, but at the lower 3.5% interest rate.
Sure, you pay less in interest, which lowers your potential tax deduction. However, you will save a lot more money in the long run.
All that said, not everyone has a good enough credit score to refinance right away. Keep making loan payments on time to slowly raise your score, then refinance down the road when your score is good enough.
Pay off some of your loans while you’re in school if you have the ability. Reducing your principal balance early means you pay less interest.
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This is especially true for subsidized