Student Loan Interest Deduction: What You Need to Know
Finding ways to save money related to student loans is always a good idea. In this article, learn about tax deductions you could be eligible for related to your student loans.
If you have student loans, you may be eligible to claim the student loan interest deduction. This deduction can help defray the cost of interest on your loans. It makes payback more affordable, for those who qualify for it.
Not everyone can get the deduction, though. You need to know the student loan interest deduction income limit as well as other rules for claiming it so you can see if you qualify for this important tax savings.
What is the student loan interest deduction?
The student loan interest deduction is simply a tax deduction for student loan interest that you pay during the course of the year.
The deduction is valued at up to $2,500 but you do not have to claim the full amount. If you only pay $1,000 in student loan interest during the course of the year, you could claim a $1,000 deduction for student loan interest. But if you pay more than $2,500 in interest, you cannot claim the excess.
A tax deduction reduces your taxable income. It's different from a tax credit. Here's how a deduction works. If you have $40,000 in taxable income and you claim a $2,500 deduction, your taxable income goes down to $37,500. You will not pay any taxes on the $2,500 that you deducted from your taxable income.
Do you have to itemize to claim the student loan interest deduction?
The student loan interest deduction is considered an above-the-line deduction. That means you can claim it even if you don't itemize on your taxes.
Itemizing is one of two methods of claiming tax deductions. You can either itemize or claim the standard deduction but not both.
If you claim the standard deduction, you can still subtract up to $2,500 in student loan interest from your taxable income if you are eligible for this deduction. Of course, if you do itemize, you still have the option to claim the student loan interest deduction too.
This is different from other common deductions, such as the mortgage interest deduction or deduction for state and local taxes. To claim these deductions, you must itemize, which means you deduct for specific expenditures that you've made throughout the year.
What are the eligibility rules for the student loan interest deduction?
In order to claim a tax break for student loan interest, you must meet certain requirements:
- You must pay interest on federal or private student loans
- You must have either taken out the loan for your education or for a qualifying dependent's education.
- The loans must have been used to pay for qualified educational expenses, such as for tuition, room and board, school fees, books, and other necessary expenditures.
- You must be legally required to repay the loan. If you are voluntarily making payments on your child's student loan, for example, you wouldn't be able to claim the student loan interest deduction.
- You do not file your taxes as married filing separately
- You cannot be claimed as a dependent on someone else's tax returns
You are allowed to claim the deduction even while you are still in school, as long as you have qualifying loans and are making payments on them. You can also deduct interest that you've paid while making voluntary prepayments on your loans.
However, there is a student loan interest deduction income limit you must be aware of.
What is the student loan interest deduction income limit?
The student loan interest deduction income limit varies depending on your filing status. If you make up to a certain income threshold, you can claim the full amount of the deduction. After that, eligibility slowly phases out.
The table below shows the income limits applicable in the 2021 tax year:
Income limit when eligibility begins phasing out
Maximum income to claim any part of the deduction
Married filing jointly
How do you claim the student loan interest deduction
You'll claim the student loan interest deduction when you submit your tax returns. You'll need to know the amount of eligible loan interest you paid.
If you've paid at least $600 in interest on a qualifying loan, you will receive a Form 1098-E, Student Loan Interest Statement from the lender you paid that specifies the amount of interest.
How much can the student loan interest deduction save you?
The value of this deduction depends on your tax bracket as well as the amount of interest that you pay on your student loans.
Say you are in the 22% tax bracket and you can claim the full $2,500 deduction. It could save you up to $550. That's because you'd avoid the 22% tax on the $2,500 you deducted.
Do you have other options to save on student loan interest?
The student loan interest deduction is a valuable tax deduction that makes paying student loans easier. But not everyone qualifies for it, and sometimes you pay more interest than you can deduct.
It's helpful to consider all of your options for saving money on student aid. If you have private student loans, refinancing may be one of those options. If you can refinance to a new loan at a lower interest rate, you could cut total repayment costs and sometimes make monthly payments lower as well.
While you can refinance both federal and private loans, only private lenders offer the opportunity to refinance. That means if you include federal loans, you'd be converting them to private ones and giving up the benefits they provide (such as loan forgiveness options and more flexible repayment options). You don't give up borrower benefits when refinancing existing private loans because you're simply changing which private lender you pay.
If you're interested in exploring options to save on your loans, Juno can help. We get groups of borrowers together and negotiate rates for private student loans and private student loan refinance loans with lenders. This helps individual borrowers get the best possible rates given their financial credentials.
Disclaimer: This material has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or other advice. You should consult your own tax, legal and accounting advisors first.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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