If you’re tackling school debt and looking for ways to maximize your tax refund, one avenue to consider is the student loan interest deduction. This benefit allows you to take a tax deduction for the interest you paid on student loans that you took out for yourself, your spouse, or your dependents. The deduction can lower how much of your income is taxed, which could result in a lower overall tax bill.
However, there’s a limit to how much you can deduct each tax year, and you must meet certain criteria in order to get the deduction. Let’s look at how the student loan interest deduction works and how to qualify for it.
Are Student Loan Payments Deductible?
Typically, when you repay a student loan, your monthly payment goes toward the original amount you borrowed plus origination fees (the loan principal) and the amount a lender charges you to borrow it (interest). With the student loan interest deduction, you are only allowed to deduct the amount you paid in interest, not the full amount of the loan payment.
Is Student Loan Interest Deductible?
The student loan interest deductible allows you to subtract up to $2,500 or the total amount of interest paid on student loans — whichever is lower — from your taxable income. Private and federal loans may qualify for this benefit. The deduction is considered “above the line,” which means you don’t have to itemize your taxes to take advantage of it.
Note that there are income phaseouts based on your modified adjusted gross income (MAGI). The deduction is gradually reduced if your MAGI falls between $70,000 and $85,000 ($145,000 and $175,000 if you’re filing jointly). The deduction is eliminated for borrowers with a MAGI of $85,000 or more ($175,000 or more if you’re filing jointly).
Who Can Deduct Student Loan Interest?
Not everyone is able to claim the student loan interest deduction. In order to be eligible for it, you must meet certain criteria:
• You paid interest on a qualified student loan for you, your spouse, or your dependents in the previous tax year. (A qualified student loan is a loan taken out to pay for qualified education expenses like tuition, housing, books, and supplies. The loan must be used within a “reasonable period” after it’s taken out.)
• You’re legally required to pay interest on a qualified student loan.
• Your MAGI in the 2022 tax year is less than $85,000 (or less than $175,000 if you’re filing jointly).
• Your filing status is anything except married filing separately.
• If you’re filing taxes jointly, neither you nor your spouse can be claimed as a dependent on someone else’s tax return.
Your eligibility may be impacted if your employer made payments on your student loans as part of a work benefit.
What to Know About the Student Loan Interest Deduction Form
If you pay $600 or more in interest on qualified student loans during a tax year, your loan servicer should send you IRS Form 1098-E. This student loan tax form is usually sent out around the end of January.
If you don’t receive a 1098-E form, you should be able to download it from your loan servicer’s website. To find out who your loan servicer is, log on to the Federal Student Aid website , and the information will be listed in your dashboard. You can also call the Federal Student Aid Information Center at 800-433-3243.
Keep in mind that if you didn’t make payments on your federal student loans because of the Covid-related payment pause — or if you didn’t pay $600 in interest during the tax year — you may not get a 1098-E form. However, you can contact your servicer to find out how much interest you paid during the year if you’re planning to report it on your taxes.
Recommended: How Student Loans Could Impact Your Taxes
Additional Education Tax Breaks
The student loan interest deduction isn’t the only benefit worth knowing about. You may also want to see if you qualify for certain education tax credits, which represent a dollar-for-dollar reduction in your overall tax burden. They can directly lower the tax amount you owe. Here are two to consider.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a credit for tuition and other qualified educational expenses paid during the first four years of a student’s college education. The credit is worth up to $2,500 per eligible student. Once your tax bill hits zero, you could earn 40% of whatever remains (up to $1,000) as a tax refund.
You must meet certain requirements in order to qualify for the AOTC. You must:
• Pursue a degree or other recognized education credential
• Be enrolled at least half time for at least one academic period beginning in the tax year
• Have no felony drug convictions at the end of the tax year
• Haven’t claimed the AOTC for more than four tax years
As with the student loan interest deduction, your income matters. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less if you’re filing jointly) in the 2022 tax year. The credit amount begins to decrease if your MAGI falls between $80,000 and $90,000 (over $160,000 but less than $180,000 if you’re filing jointly). The credit is eliminated if your MAGI is over $90,000 ($180,000 if you’re filing jointly).
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) works a little differently. The credit is worth 20% of the first $10,000 of qualified educational expenses, or a maximum of $2,000 per year. Unlike the AOTC, which only applies to the first four years of a student’s college education, the LLC includes undergraduate, graduate, and professional schools, and courses needed to acquire job skills. There’s no limit to the number of years you can claim it.
However, the LLC has a lower income limit, which means it could be more difficult to qualify for. The credit amount gradually decreases if your MAGI falls between $80,000 and $90,000 ($160,000 and $180,000 if you’re filing jointly) in the 2022 tax year. The credit is eliminated if your MAGI is $90,000 or more ($108,000 or more if you’re filing jointly).
Strategies to Lower Monthly Student Loan Payments
Borrowers looking to save beyond tax time may want to explore ways to lower their monthly student loan payments.
One option to consider is a Direct Consolidation Loan. This loan is offered through the Department of Education and lets you combine different federal student federal loans into a single loan, resulting in one monthly payment. It can also lower your monthly payment amount, allow you to switch from a variable to a fixed interest rate, and help set up loans that are eligible for forgiveness.
Another strategy to think about is refinancing your student loans with a private lender, resulting in one new loan, hopefully with a lower interest rate. Just realize that if you refinance a federal student loan, you will lose access to federal protections and programs, such as the Covid-related payment pause, the Public Service Loan Forgiveness program, and income-driven repayment plans.
Recommended: 7 Tips to Lower Your Student Loan Payments
The Takeaway
The student loan interest deduction can lower how much of your income is taxed, which could result in a lower overall tax bill. Depending on your income, you can deduct up to $2,500 of the interest paid on your loans. If you earn more than $85,000 a year (or $175,000 if you’re filing jointly), you are not eligible. Education tax credits, like the American Opportunity Tax Credit and the Lifetime Learning Credit, could also help lower your tax bill. Like the student loan interest deduction, you must meet certain criteria to be eligible.
There are different strategies that may help you lower your monthly payments so you can save outside of tax time. A Direct Consolidation Loan, for example, lets you combine multiple federal loans into a single loan and switch from a variable to a fixed interest rate.
Another option is to refinance your student loans, which allows you to shorten or extend the loan term. A longer loan term typically results in lower monthly payments but more total interest paid. Shortening your loan term may result in higher monthly payments but significantly less total interest paid.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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