Here’s How Your Student Loans Can Get You a Tax Break

Paying interest is no fun, but if you have student loan debt, you don’t have much choice. Fortunately, the government offers a break. Here's how to get it.

Paying interest is no fun. But if you have student loan debt, you don’t have much choice.

Wouldn’t it be great if the government gave you a break on that student loan interest you pay each year?

Well, here’s some good news: You might be able to deduct a portion of student loan interest from your taxable income — up to $2,500 — thanks to the student loan interest tax deduction. Find out if you qualify for this deduction and learn how to claim it below.

How the Student Loan Interest Tax Deduction Works

The IRS lets you claim the student loan interest tax deduction on Form 1040, Line 33. Because it’s considered an “above the line” deduction (i.e., an adjustment to your income), you don’t have to itemize your taxes in order to claim it.

Keep in mind, this is a deduction and not a credit. That means claiming this deduction will reduce your taxable income by up to $2,500. In terms of real dollars saved, your total tax bill could be reduced by up to $625, depending on your income and how much student loan interest you pay.

Who Qualifies for the Deduction?

There are three qualification criteria you need to meet in order to claim the student loan tax deduction:

  1. Have a Qualified Student Loan: First, you need to have a qualified student loan. The IRS says that the loan must be taken out to pay for qualified education expenses. Not only that, but it can’t be a loan from someone related to you, or provided as part of a qualified employer plan. So, if your grandma offers you a loan for your education, and you pay interest to her on top of making principal payments, you can’t deduct that interest. The same is true if your employer offers student loans as part of a company benefit. Only loans from the federal government or a private lender will qualify.
  2. Be a Qualified Student: Next, the loan must be taken out on behalf of a qualified student in order to deduct the interest. The student can be you, your spouse, or your dependent. So, you can still deduct student loan interest from your income, even if the loan is financing your spouse’s or child’s education and not yours. However, no matter who that student is, they must have been enrolled at least half-time in a program at an eligible educational institution when the loan was taken out. The program should lead to a degree, certificate, or other recognized credential.
  3. Meet Income Requirements: Finally, there is an income requirement. The IRS won’t let you claim the student loan interest deduction if your modified adjusted gross income (MAGI) is at least $160,000 if married filing jointly or $80,000 for other filing statuses.

To see if you qualify and find out how much you might personally save on your taxes, you can use a student loan interest deduction calculator to run the numbers. The IRS also offers a handy tool to determine if you qualify for the deduction. It takes about 10 minutes to complete.

How the Deduction Impacts Your Tax Bill

Realize that a tax deduction reduces your income; it doesn’t mean a dollar-for-dollar reduction in what you pay in taxes (that’s a credit). With a tax deduction, your tax bill is smaller because your taxable income is lower.

In the case of the student loan interest tax deduction, the maximum tax benefit is $625. Your actual tax benefit is determined by your income, filing status, and how much you paid in student loan interest.

Say you file single, your MAGI is $45,000, and you paid $800 in student loan interest. Your income might be reduced by $800, but the actual impact on your taxes is to lower what you pay by $200.

It’s still a reduction in what you owe, and when you combine the student loan interest tax deduction with other deductions and credits, it can make a big difference in your final tax bill (or refund).

How to Claim the Student Loan Interest Tax Deduction

Start by taking a look at how much you paid in interest (not your total student loan payments). That information can be found on Form 1098-E. Each of your student loan servicers should send you a copy. You can find the interest you paid in Box 1.

Add up the amounts from all your forms and enter it on your tax form in the appropriate place. However, you might need to make sure you meet the income requirement.

According to the IRS, your MAGI is basically your adjusted gross income (Line 37 of the Form 1040) after adding back in certain deductions. Some of the deductions you add back in include:

  • Student loan interest
  • One-half of your self-employment tax
  • Tuition and fees deduction
  • IRA contribution deduction
  • Certain investment losses
  • Exclusion for adoption expenses

For example, your adjusted gross income might be $40,000. However, you claimed $3,000 in IRA contributions and $1,000 in student loan interest. Plus, your side gig meant a self-employment tax deduction of $500. That’s $4,500 in deductions. To calculate your MAGI, add that $4,500 back to your adjusted gross income. You end up with a MAGI of $44,500.

As long as your MAGI meets the IRS income requirements, you can still claim the deduction. If all those deductions you’re claiming put your MAGI over the top, you have to erase the deduction from your form.

The student loan interest tax deduction can be a great way to reduce your taxable income and lower your tax bill. It’s best used in conjunction with other tax breaks, so consider consulting a tax professional to find out how to best take advantage of all your options. You can find a quick guide to other common tax deductions and exemptions here.

Image: PeopleImages

The post Here’s How Your Student Loans Can Get You a Tax Break appeared first on

There Are Just 2 Things Student Borrowers Need to Know Before They Pay Their Taxes

student loan refinancing

Those two things can also make a nice pair — sort of a “two negatives make a positive” thing. That’s because any interest you pay on a qualified education loan is tax deductible up to $2,500. Sure, a tax deduction doesn’t really make up for the home you might have bought or the money you could have saved had it not been for the crushing cost of your education, but it helps a little bit, right?

Beyond actually paying interest on a qualified education loan (which pretty much includes any student loan used for expenses like tuition and fees, room and board, transportation, books and other expenses related to your education), there are basically two things you need to know in order to claim the deduction. First, only one person or married couple filing jointly can claim it, and second, you can’t make a ton of money.

Talk to Your Parents

The most common mistake student loan borrowers make when trying to claim the student loan interest deduction is not knowing that only one person can do so, said Lisa Greene-Lewis, a tax expert and CPA for TurboTax. This problem tends to come up with recent graduates and their parents, especially as the borrower starts to establish independence, moving out on their own and filing their own taxes.

“Parents may have been claiming them as a dependent and taking that deduction or claiming that education credit,” Greene-Lewis said. “The parents and the student need to communicate. Only one person can claim that, and it’s the person that claims the exemption for the dependent.”

Check Your Pay Stub

There’s a cap on how much you can earn while claiming the student loan interest deduction. The deduction phases out as your modified adjusted gross income increases, going away if your income exceeds the limits. An individual with a modified adjusted gross income of more than $80,000 and a married couple filing jointly earning more than $160,000 cannot take the deduction.

“Starting out, it’s nice,” said Bill Farmer, an enrolled agent in Lexington, Ky., “but if you actually start making any real money, you don’t get it.” Farmer said a lot of people make the mistake of not realizing they earn too much to claim the deduction, so they take it when they shouldn’t. That could result in owing more than you thought you would, receiving less of a refund than you anticipated or running into trouble with the IRS if you file with the error and are audited. (Working with tax software or a tax professional can also help you avoid that problem.) Keep in mind you can amend a tax return after you’ve filed it if you realize you’ve made a mistake.

Figuring out how much you paid in student loan interest should be easy: Your student loan servicer should provide you with a 1098-E stating that figure. If you didn’t get it in the mail, check your online account or contact your servicer. Taking advantage of the deduction can help you reduce your tax liability or increase your tax refund, so it’s worth your time to see if you qualify for it.

And don’t forget, your student loan payments also impact your credit score. If you want to see how, you can get a copy of your free annual credit reports from each of the major credit bureaus. You also can also check your credit scores for free each month on

More Money-Saving Reads:

Image: Photodisc

The post There Are Just 2 Things Student Borrowers Need to Know Before They Pay Their Taxes appeared first on