When you claim a deduction on your taxes, it is subtracted from your total income for which your income taxes are assessed. This is different from a tax credit, which is subtracted from any taxes you may owe.
The student loan interest deduction applies to any interest payments on qualifying student loans made in the previous tax year. This includes any interest payments required by your lender and any extra payments you may have made. (For example, if you are paying back your loans faster than the repayment plan requires, and some of your additional payments went to interest.) The maximum student loan interest deduction limit is $2,500 (as of the current 2018 tax year), even if you paid more to your student loans in a given year.
Not all loans will qualify; loans must have been used for “qualifying educational expenses” according to the IRS. These include: tuition and fees, room and board (determined by the allowance for room and board according to the institution), books, supplies, equipment, and any other necessary expenditures such as transportation. Additionally, the loans must have been used at a qualifying institution.
The IRS considers qualifying institutions to be “any college, university, trade school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.”
You should receive a tax form 1098-E from any student loan lender to whom you paid $600 or more in interest during the tax year.
Student Loan Interest Deduction Income Limit
With over $1.5 trillion in outstanding student loans in the United States and the majority of college students taking out student loans to fund school, college graduates in the United States are familiar with student loan debt.
And if you’re like most students, you don’t want to spend one dollar more on paying back those student loans than you absolutely must. To do this, it’s important to be aware of all potential avenues available to save, one of which may be the tax deduction for student loan interest .
Unfortunately, not all student loan borrowers will qualify for the student loan interest deduction. To know whether you qualify, you can start by finding your Modified Adjusted Gross Income (MAGI) from last year.
You might be thinking that the student loan interest deduction is a small silver lining when you’re making hefty debt payments. But on the bright side, every bit counts when you’re paying back student loans, right? Below, we’ll discuss how this deduction works, the student loan interest deduction income limit, and when you might be unable to qualify for the deduction.
Before we get into it, we just want to give you a friendly reminder that this is a general overview of a pretty intense subject. You should definitely consult a tax professional before making any big decisions.
How Student Loan Interest Deduction Works
In addition to a deduction limit, there are rules regarding how much money you can earn to use the student loan interest deduction. According to IRS student loan rules, you are not eligible if your Modified Adjusted Gross Income (MAGI) is more than $80,000 per year, or $165,000 if you file a joint return.
Your ability to use the deduction begins to phase out at $65,000 (filing yourself) and $135,000 (filing jointly. This is all for the 2018 tax year. Here’s how to calculate how much you qualify for . But P.S., for the 2019 tax year, the income threshold is going up: for single peeps, the deduction will start to phase out at $70,000—and it’ll be $140,000 for married filing jointly.
If you meet the above income qualifications, you can claim the student loan interest deduction limit on any qualifying student loan made by you, your spouse (if married and filing jointly), or a dependent. You may not deduct your student loan interest if someone else claims an exemption for you on a tax return, or if you are married and not filing jointly.
Other Ideas for Lowering Student Loan Payments
If you’re currently applying to, or have enrolled in school, you may want to consider how much student loan debt you’re taking on and whether it’s an amount that you’ll reasonably be able to pay back over a standard repayment term.
Another important tip to keep in mind: avoiding taking out more in student loans than you absolutely need can make repayment easier. If this means working a few hours a week while you’re in school to cover your fun and travel money, it might be worth it. You can also apply for scholarships, even after you’ve enrolled in school.
You could also consider more affordable options, like state school and community college. While you should certainly do what’s best for your needs and your future, it’s important to weigh all the options that may be available to you.
If you’ve already graduated and are looking for ways to lower your monthly payments or shorten your loan term, consider refinancing your student loans with an online lender like SoFi.
Refinancing is the process of paying off your student loans (both federal and private) with a new loan at a lower interest rate.
A lower interest rate could significantly reduce the amount of money a borrower pays in interest over the life of the loan. However, a borrower could opt instead to extend their loan term, which might not lower the interest they pay over the life of the loan—but it could lower their monthly payments.
A lower monthly payment can feel like a better deal, but compounding interest works in such a way that even a year or two added to the duration of the loan can increase the total interest owed by quite a bit. Play around with a student loan refinance calculator to see the difference in total interest paid with lower interest rates and different loan durations.
The reverse is also true; refinancing to a shorter loan length will increase your monthly payment but lower the amount that you pay in interest, overall. If you’re able to, you might want to consider this strategy.
An alternative that may feel more comfortable is to pre-pay more than the required amount towards your loan when that money is available to you (for example, when you get a semi-annual or quarterly bonus).
If this is a path you’d like to consider, be sure that your new lender allows prepayment without penalty, and remember to tell the lender to apply the additional payment to the loan’s principal.
You shouldn’t refinance a student loan if you’re using or planning on using one of the federal repayment programs such as Public Student Loan Forgiveness or an income-driven repayment plan (you forfeit your access to those benefits if you refinance).
When you refinance, you’re taking out a new private loan, so you’ll lose federal loan repayment options. Even if you’re not able to refinance, paying more than your monthly payment is a strategy that can help you pay off your loans faster, and help you pay less in interest over time.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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.