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Student Loan Interest Deduction

You may be able to reduce your tax liability by hundreds of dollars with the student loan interest deduction. It’s important to file for the deduction properly to maximize your savings and avoid penalties due to errors.

What’s the Student Loan Interest Deduction?

Similar to the mortgage interest deduction, the IRS also allows you to deduct student loan interest on your taxes — with a cap. The total savings available with the student loan interest deduction can add up to hundreds of dollars, but nearly 25% of those who pay student loans aren’t aware of the tax benefit.

The student loan interest deduction is available even if you don’t itemize your deductions. The Tax Cuts and Jobs Act of 2017 eliminated several deductions and increased the standard deduction but students and graduates can still benefit by deducting up to $2,500 from their modified adjusted gross income.

Bear in mind that the deduction isn’t a tax credit and simply means that less income is subject to your normal tax rate.

For example, a single filer with a modified adjusted gross income of $40,000 per year would be in the 22% tax bracket for 2019 and the student loan interest deduction could be worth $550.

Eligibility

The student loan interest deduction can be applied to both private loans and federal loans. However, it can’t be applied to interest on loans from family members. Additionally, the loan must have been borrowed for you, your spouse or your dependent for its interest to be deductible.

The IRS also requires that the loan be a qualified loan, which means the loan must be used solely for educational expenses, such as room and board, tuition and fees, books and school supplies or transportation to/from school. Loans used for mixed purposes, like credit card debt or other payments, are not eligible.

Only the person named on the loan can take the deduction. A parent or other person paying a loan in the student’s name can’t take the deduction. However, a parent with a loan in his or her own name (on behalf of a child) can take the deduction if all other eligibility requirements are met.

Additionally, you can’t be claimed as a dependent on someone else’s tax return. A tax filing status of single, married filing jointly or head of household is required to take the deduction, which rules out dependents and married couples filing separately.

The student loan must be for a school that offers a degree program, although both graduate and undergraduate programs are eligible. Half-time enrollment at a minimum is also required for the student loan interest deduction.

What It’s Worth

The student loan interest deduction is worth a maximum of $550 in tax savings, depending on your income tax bracket. However, if you’re in the phaseout income group or a lower tax bracket, the deduction may be worth a lower amount.

Your adjusted gross income (AGI) is your gross income minus any allowable deductions (retirement plan contributions, student loan interest and health insurance premiums).

The student loan interest deduction is based on your modified adjusted gross income (MAGI). Your MAGI for student loan purposes, in most cases, is your adjusted gross income before subtracting any deduction for student loan interest. In effect, the interest is added back to your income to determine your MAGI.

Your MAGI drives your eligibility for the student loan deduction:

Single FilerFull deduction with MAGI below $65,000Partial deduction with MAGI at or above $65,000No deduction with MAGI at or above
Married Filing JointlyFull deduction with MAGI below $135,000Partial deduction with MAGI at or above $135,000No deduction with MAGI at or above $165,000
Married Filing SeparatelyNo deductionNo deductionNo deduction

How to Calculate the Student Loan Interest Deduction

The student loan interest deduction is an above-the-line deduction, which means you can take it regardless of whether you itemize your deductions or take the standard deduction. The deduction is based on a maximum interest deduction of $2,500. If your student loan interest for the year was $2,000, then you can only deduct $2,000. If your student loan interest was $5,000, you can still only deduct a maximum of $2,500.

Unfortunately, the student loan interest deduction also comes with a marriage penalty. You can only deduct up to a maximum of $2,500 per return as opposed to $2,500 per person. Unfortunately, there’s no way around this because married couples filing separately can’t claim the deduction.

One thing that can complicate the formula for the student loan interest deduction for some filers is that the qualification levels are based on MAGI. This figure is different than your W-2 earnings and may even differ from your adjusted gross income (AGI), which is your taxable income minus certain allowable deductions.

To calculate your MAGI, you’ll have to add some of those AGI deductions back to your income. Consider using software that can automate this process. The best tax software packages can make doing your taxes a breeze, minimize errors and highlight opportunities to save money with deductions or tax credits.

If you’re eligible for a full deduction, you simply multiply the student loan interest by your tax rate to determine the amount you’ve saved.

How to Claim the Student Loan Interest Deduction

If you’re using tax software, read the questions presented by the software carefully. Many people miss the question about this deduction and leave money on the table. If you file taxes on your own, read the Form 1040 instructions carefully as well as the instructions for Schedule 1.

Free tax software options can help you do the calculations but you may have to pay a small filing fee if additional tax forms are required.

Documents You Need

Your student loan lender will send a year-end summary called a 1098-E form shortly after the first of the year. Lenders are required to send this form if you’ve paid more than $600 in interest for the year. The 1098-E details the exact amount of interest you paid for the tax year, which you’ll need to calculate your deduction.

If you didn’t receive a 1098-E, call your lender to get the interest amount paid or check your account on their website, which may have a printable summary.

You’ll also need the following:

  • Basic income information, including W-2, 1099, etc.
  • Your adjusted gross income, calculated separately on your taxes
  • Educational expenses paid with nontaxable funds

For those with foreign earned income or those who are residents of Puerto Rico or American Samoa, you may also need your calculated values for:

  • Foreign earned income exclusion
  • Foreign housing exclusion
  • Foreign housing deduction
  • Exclusion of income by bona fide residents of American Samoa
  • Exclusion of income by bona fide residents of Puerto Rico

The above values, if they apply, have to be added back to your adjusted gross income, raising your modified adjusted gross income and possibly affecting your eligibility or the value of the deduction.

Where to Claim it on Your Tax Forms

You claim the student loan interest deduction on Form 1040 Schedule 1.

Form 1040 Schedule 1 - Source: IRS.gov
Form 1040 Schedule 1 – Source: IRS.gov

IRS tax publication 970 (Chapter 4) provides further guidance on how to calculate the student loan interest deduction under different income of tax filing status scenarios.

The IRS also provides a worksheet for Form 1040 Schedule 1 deductions, including a section for the student loan interest deduction.

Making the Most of the Student Loan Interest Deduction

For most students and grads, the math is fairly straightforward for calculating the student loan interest deduction. Where it can become tricky is when your income is within the phaseout range.

Consider using tax software to complete your taxes. Not only does software take care of the math, but the better packages also do a great job of pointing out opportunities to save with deductions or credits that many people might otherwise miss.