Deducting Student Loan Interest: Everything You Need to Know
As with most tax regulations, however, the perks don’t apply to everybody. We’ve broken down who can deduct the interest paid on their student loans and how to go about doing so.
A Deduction Is Not a Refundable Credit
Before we go any further into this topic, there’s one thing we need to clarify: a deduction is not the same thing as a refundable tax credit. Yes, both deductions and tax credits can affect your tax refund, but the IRS treats them differently:
- A deduction lowers your taxable income. If you have $1,000 in deductible expenses, it means you can subtract $1,000 from your taxable income.
- A refundable tax credit reduces the amount of tax you owe. If you have $1,000 in refundable tax credits, it means you can subtract $1,000 from the amount you owe in taxes.
Student loan interest can be deducted from your taxes — but it is not a tax credit!
Plenty of people get deductions and tax credits confused, so we wanted to make sure you knew the difference.
Who Qualifies to Deduct Student Loan Interest?
The IRS has rules about who can and cannot deduct student loan interest from their taxes.
You will probably be eligible to deduct student loan interest if you:
- Paid interest on a student loan (federal or private) in the current tax year
- Did not receive the student loan from a related person (parent, grandparent, etc.)
- Did not receive the student loan from a qualified employer plan
- Are not filing as “married filing separately”
- Are not listed as anyone else’s dependent (if you are married filing jointly, your spouse cannot be listed as a dependent either)
- Have a modified adjusted gross income (MAGI) that falls below the IRS limit, which changes annually
Reminder: You cannot deduct your full student loan payment, and you can’t deduct any processing costs or fees associated with your student loan payment. You can only deduct the amount you pay in interest.
Helpful IRS tool
If you’d like to quickly determine whether or not you qualify, the IRS has an interactive tool to help you determine eligibility.
You’ll answer questions about your filing status, whether your student loan has ever been refinanced (in most cases, you can deduct student loan interest from a refinanced loan), and whether the student loan was taken out to pay qualified educational expenses.
You’ll also need to know your current modified adjusted gross income (MAGI) — but if you haven’t done this year’s taxes yet and your income is roughly the same as it was last year, you can enter last year’s adjusted gross income, which is found on line 37 of Form 1040.
What Is Your Adjusted Gross Income?
Your adjusted gross income (AGI) is your gross income minus all of the deductions found on lines 23–35 of Form 1040.
In other words, it’s all of the money you earned in the previous tax year minus certain expenses — such as the money you paid towards your health savings account or the money you put into a traditional IRA. (These are often called “above-the-line” deductions.)
If you’re doing your taxes with a tax software program or working with a CPA, they’ll take care of your AGI for you.
If you want to calculate your AGI yourself, you’ll need to grab a 1040 and subtract all of the eligible deductions from your gross income.
How Much Student Loan Interest Can You Deduct?
The IRS only lets you deduct $2,500 in student loan interest.
In other words, even if you paid more than $2,500 in student loan interest in the current tax year, you’ll only be eligible to deduct the first $2,500.
If you are married filing jointly, you and your spouse will only be able to deduct up to $2,500 in student loan interest combined — you don’t each get a $2,500 deduction.
However, you might not qualify for the full $2,500 deduction. Your student loan interest deduction is reduced, or “phased out,” if your AGI is above a certain level.
Depending on how much you earn, your eligible student loan interest deduction might be lower than $2,500 — and if your AGI is high enough, you won’t qualify for the deduction at all.
You also need to know how much you paid in student loan interest during the current tax year — and, in most cases, your lenders will send you that information via Form 1098-E.
Lenders are required to mail you Form 1098-E if you paid $600 or more in student loan interest, so keep an eye out for your forms!
Here are a few scenarios in which you will not be eligible to deduct your student loan interest:
- If your student loan interest is an allowable deduction on another part of your tax return, such as a home mortgage payment.
- If you are not legally required to pay back the loan. In some cases, your parents are legally required to pay the loan — so they’re the only people who can deduct the interest.
- If your student loan interest payments were made through certain types of loan assistance programs, such as the National Health Service Corps Loan Repayment Program.
Should You Put Less Money Towards Your Student Loans for the Tax Deduction?
If you get a tax deduction for the interest you pay on your student loans, is there an advantage to stretching your loan payments out, racking up the interest, and maximizing your deduction?
When it comes to student loans, it’s still a better idea to pay them down as quickly as you can. Remember that a tax deduction doesn’t put money in your pocket. It just reduces your taxable income.
If you want to save money, get those loans paid off and pay as little interest as possible.
If You’re Struggling to Pay Back Your Student Loans
If you’re having trouble making your student loan payments, here are some strategies to consider:
Refinancing and consolidating
Refinancing or consolidating your student loans could reduce your monthly payment cost and/or the amount you pay in interest.
Essentially, you use another loan to pay off your student loans. You could end up reducing interest paid if you find a new loan with a lower APR.
Eligibility for loan forgiveness
There are numerous loan forgiveness programs out there, many associated with particular careers.
You might also be eligible for loan forgiveness if you are part of the military or if you work in a public service job.
Income-based payment plans
Income-based payment plans limit the amount you are required to pay towards your student loans every month and can reduce the amount of interest you pay.
Deferment or forbearance
If you defer your student loans, you’ll start paying them back in the future when, assumedly, you’re earning more money — and, depending on the type of loan, you might not get charged interest during the deferment period.
Forbearance pauses your student loan payments but doesn’t pause your interest, so try to get back to making those loan payments as soon as possible.
Both options can provide financial relief when you're struggling to repay student loans.
Compare Deferment vs. Forbearance
Deducting the interest you pay on your student loan is a good way to reduce your annual tax burden — and it’s a good way to see how much of your student loan payments are going towards interest!
Once you know exactly how much you’ve paid in student loan interest in the past year, you might be motivated to increase your monthly student loan payments and get that loan paid off as fast as you can.
But if you’re staring down several years of student loan payments, remember the silver lining: you might be able to deduct your interest payments on your taxes.