Student Loan Interest Deduction: Who Qualifies and How to Claim ItPersonal Taxes
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With outstanding student debt approaching the $2 trillion mark, the Student Loan Interest Deduction has become an attractive tax break for millions of Americans.
Unlike other tax deductions that expired when Congress passed the Tax Cuts and Jobs Act of 2017, the student loan adjustment emerged virtually unchanged.
Here’s a look at this valuable income tax deduction.
Student Loan Interest Deduction Overview
What Is the Student Loan Interest Deduction?
The Student Loan Interest Deduction is a tax break that allows taxpayers to subtract up to $2,500 of interest paid on qualified student loans from their total income. It is one of several tax deductions available to students that help stem the exorbitant cost of earning a college degree.
To qualify, the loan must have been used solely to pay expenses incurred during an academic period for a student at an eligible educational institution. Expenses include tuition and fees, room and board, books, supplies and equipment.
How Much Is the Student Loan Interest Deduction?
A taxpayer can deduct the lesser of $2,500 or the amount of interest actually paid during the year. The deduction can be reduced and eventually eliminated by income limitations based on the taxpayer’s Modified Adjusted Gross Income (MAGI) and filing status (see table below).
When and Why Did Congress Enact the Student Loan Interest Deduction?
The Student Loan Interest Deduction was introduced in 1894 as part of our first modern tax code. The deduction had been altered and even removed over the years until Congress brought it back in 1998 as part of the Taxpayer Relief Act.
Until then, the student loan deduction was part of a broader family of interest-rate tax deductions that also included credit cards and car loans.
But with college tuition rates increasing at more than twice the normal inflation rate, Congress decided it was time to give students a specific, permanent tax break. The initial maximum deduction was $1,000.
The deduction has seen some minor changes over the years, but has remained largely unchanged since 2011 when the deduction limit was set at $2,500.
Student Loan Interest Deduction Requirements
In order to qualify for the tuition interest adjustment, the student must meet all of these criteria:
- The taxpayer must have been enrolled for at least six credit hours during any semester in a program leading to a college degree, certificate, or other recognized educational credential.
- The loan was for yourself, your spouse, or a person who was your dependent when the loan originated.
- You’re legally obligated to pay the loan interest and paid it during the tax year.
- Your Modified Adjusted Gross Income (MAGI) is less than $70,000 and no more than $85,000 ($140K – $170K MFJ). (For most taxpayers, MAGI is your Adjusted Gross Income (AGI) before subtracting a deduction for student loan interest and other items such as the Foreign Earned Income Exclusion.)
- You or your spouse, if filing jointly, can’t be claimed as a dependent on someone else’s return.
- Your filing status isn’t married filing separately.
The loan must have originated to pay for higher education costs incurred while attending an eligible educational institution.
The loan must be paid back within a reasonable period of time (the IRS has been known to be flexible on this as long as the borrower is showing good faith). The loan cannot have been from a related person or made under an employer benefits plan.
An eligible educational institution generally is any accredited public, nonprofit, or for-profit college, university, vocational school, or other postsecondary institution. The institution must be eligible to participate in a student aid program administered by the U.S. Department of Education.
For the 2019 tax year, if you make less than $70,000 and you’re single or less than $140,000 and you file as married filing jointly, you are eligible to take the full $2,500 student loan interest deduction.
If you make more than $85,000 and you’re single or more than $170,000 and you file as married filing jointly, you are not eligible to take the student loan interest deduction.
If your income is somewhere between $70,000 and $85,000 and you’re single or between $140,000 and $170,000 and you file as married filing jointly, you may be eligible for a reduced student loan interest deduction.
|Filing Status||Phaseout Begins||Phaseout Ends|
|Head of Household||$70,000||$85,000|
|Married Filing Jointly||$140,000||$170,000|
2020 income limitations have not been released but likely will be adjusted slightly for inflation.
Filing Status Requirement
In order to qualify for the Student Loan Interest Deduction the taxpayer must choose a filing status of single, head of household, married filing jointly (MFJ) or qualifying widow(er). The adjustment cannot be claimed if choosing the married filing separately (MFS) status.
To claim the deduction, you must claim yourself on a tax return. You cannot claim the deduction unless you are listed as either the taxpayer or spouse (on a joint return).
If you are someone’s dependent on their return, or are even eligible to be their dependent, you cannot claim the deduction. Only the person responsible for paying the debt — meaning it’s under his or her Social Security number — can claim it by filing his or her own return.
What Counts as Student Loan Interest?
Loans originated by private companies or the federal government account for the vast majority of student loan interest in America. However, the following may also be claimed as student loan interest.
Loan Origination Fees
In general, this is a one-time fee charged by the lender when a loan is created. To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services.
This is unpaid interest on a student loan that is added by the lender to the loan’s outstanding principal balance. For tax purposes, it is treated as deductible interest.
Credit Card Interest
Interest on a revolving line of credit qualifies for the adjustment as long as the borrower uses the loan to pay qualified education expenses.
Claiming the Deduction for Others’ Student Loans
If you make student loan payments on behalf of someone else, you are not eligible to take the deduction.
Likewise, if you are the person legally obligated to make payments but someone else is paying your debt, then you are eligible to take the deduction on your tax return.
Claiming the Deduction on Your Spouse’s Student Loans
In order to claim the deduction on your spouse’s student loans you must file jointly.
The taxpayer, spouse, or both can take the deduction. If you and your spouse file separately, neither of you can claim the adjustment.
Claiming the Deduction for Your Dependents’ Student Loans
As previously mentioned, in order to claim the student loan adjustment you must be legally obligated to pay interest and actually have paid it. In addition, you must file a tax return and no one else can claim you on their tax return.
If the student loan belongs to you, and your parents or someone else claims you on their return, no one can take the deduction.
This applies even if your parents are paying the student loan interest on your behalf. Be sure to check with your tax professional before filing your family’s returns.
How to Claim the Student Loan Interest Deduction
Claiming student loan interest on your tax return is relatively simple. Here are the basic steps.
Step 1: Make sure you use the correct filing status.
Only those with qualifying status of Single, Head of Household, Married Filing Jointly, or Qualifying Widow(er) can take the student loan interest deduction.
Step 2: Calculate your Modified Adjusted Gross Income.
If you are filing single, HOH, MFJ or QW, you are eligible to deduct up to $2,500 if your income is less than $70,000.
The amount of your student loan interest will be reduced if your MAGI falls between $70K and $85K and will be $0 if it exceeds $85K. The phase out range for couples filing MFJ is $140,000 – $170,000.
Step 3: Make sure you aren’t double dipping.
You can’t deduct interest paid with earnings from a qualified tuition program (QTP) because this would be considered taking a tax benefit twice. So if you used any money from a 529 or Coverdell Education Savings Account to pay off a portion of your loan, you must remove this portion of your student loan interest.
Step 4: Get your Form 1098-E.
Your lending company should send you a 1098-E form each year by Jan. 31 showing how much interest you paid.
Step 5: Input your 1098-E information in your tax software.
Most software should do the rest. But if you’re still completing your taxes with pencil and paper — God bless your soul — use IRS Pub. 970, Worksheet 4-1 to compute the deduction, and enter the result on Form 1040, Schedule 1, Line 20.
Other Tax Breaks for Education
In addition to the Student Loan Interest Deduction, there are several other valuable tax credits and deductions available to taxpayers. Just like the student loan deduction, there are various restrictions when claiming these benefits, including filing statuses and income limitations.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a tax credit that can be claimed on up to $4,000 in education expenses — primarily tuition, fees and books — paid during the first four years of college.
A maximum credit of $2,500 per student can be claimed on your tax return. The credit equals 100 percent of the first $2,000 of qualified education expenses and 25 percent of the next $2,000.
But even if the credit lowers your tax liability to zero, 40 percent of the remaining amount of the American Opportunity Tax Credit (up to $1,000) still can be refunded to you.
Lifetime Learning Credit
The Lifetime Learning Credit is often used when a student has used all four years of the American Opportunity Tax Credit, mainly when he or she attends graduate school. As the name implies, a taxpayer can claim the credit regardless of age, as long as he or she has qualified expenses from an accredited institution.
The credit is worth 20% of expenses, up to $2,000. Unlike the American Opportunity Credit, the Lifetime Learning Credit is not refundable, meaning the taxpayer must have some taxable income in order to claim even a portion of the credit.
Tuition and Fees Deduction
If a student does not qualify for either of the above credits, he or she still might be able to reduce his or her income up to $4,000 by claiming this deduction. The maximum income limitations for the Tuition and Fees deduction are higher than those for the Lifetime Learning Credit ($80,000 for tuition and fees and $68,000 for lifetime learning; and $160K vs. $136K if MFJ).
This can allow taxpayers to apply the Tuition and Fees deduction should they not qualify for the Lifetime Learning Credit. It’s a good idea to calculate both options.
Coverdell Education Savings Accounts
These tax-deferred accounts can assist families in paying for their children’s higher education expenses. Parents can contribute up to $2,000 annually to a child’s account through age 18.
Contributions are always disbursed tax-free. Earnings grow tax-deferred but are taxable when used to pay higher education expenses. Coverdell funds must be used by the time a student is age 30 or taxes and penalties will accompany withdrawals.
Frequently Asked Questions
- Does refinancing or consolidating my student loans affect my ability to take the Student Loan Interest Deduction?
Only if you refinance the loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses. If this is the case, you cannot deduct any interest paid on the refinanced loan.
- Can I take the student loan interest deduction even if I don’t itemize deductions?
Yes. Student loan interest is taken as an adjustment to income on Form 1040 and has nothing to do with itemized deductions, which are taken on Schedule A.
- Does it matter if my loans are federal or private to take the deduction?
No. The loan can originate from any qualified private or public lending institution.
- I didn’t receive a Form 1098-E. How do I calculate my deduction?
First, contact your lender. It should have provided a 1098-E. But if you can’t get it, you can calculate the interest within a few dollars yourself.
The simplest, most basic formula: Multiply your annual interest rate by the outstanding principal of your loan at the beginning of the year.
David was originally in the newspaper business, spending over 25 years as a writer and editor. He is now an enrolled agent — the highest credential issued by the I.R.S. — and has been serving clients as a tax adviser and preparer for over 10 years. He currently works at DC & Associates, P.A. in Casselberry, Florida.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.