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Since 1998, the number of Americans claiming the student loan interest deduction at tax time has more than tripled, from less than 4 million to more than 12 million. Yet Congress hasn’t increased the maximum deduction in almost 20 years, and fewer than one in three student loan borrowers claims it.
An analysis of more than than two decades of IRS data reveals some surprising facts about who benefits the most from the student loan interest deduction:
- All told, Americans have deducted more than $165 billion in student loan interest payments at tax time, with the average deduction climbing from $460 to $1,089
- Married couples filing joint returns represent only about one-third of all tax filers, but claim roughly half of the nearly $14 billion in deductions awarded each year
- Millennials claim nearly two-thirds of deductions, but deductions awarded to taxpayers 55 and older are approaching $2 billion a year
- Although the tax break is fairly well-targeted at the middle class, one-fifth of deductions go to families making $100,000 or more
Although both the Obama administration and House Republicans have tried to do away with the tax break, Congress is now considering expanding it. Here’s what you need to know about the value of this “above-the-line” deduction to different borrowers, and how to claim it.
In this article:
- How the student loan interest deduction works
- Historical trends: More and bigger claims
- Why more people don’t claim the deduction
- Married couples claim half of all deductions
- Millennials are not the only beneficiaries
- Deduction is well-targeted at the middle class
- Future of the student loan interest deduction
- Claiming the student loan interest deduction after refinancing
How the student loan interest deduction works
If you’re paying interest on student loan debt, federal or private, you may qualify to deduct up to $2,500 in student loan interest payments from your income and earnings. Depending on your tax bracket, the reduction in your adjusted gross income (AGI) can save you up to $550 on your tax bill, although the average savings is closer to $200.
The student loan interest deduction is an “above-the-line” adjustment, meaning you can claim it even if you don’t itemize your deductions. So even if you’re like most taxpayers and just take the standard deduction, the student loan interest deduction might still save you money.
If you’re single, the deduction starts phasing out if your 2019 adjusted income is above $70,000, and you can’t claim it at all if you make more than $85,000.
The 2019 limits for married couples are a little higher, with the phaseout starting at $140,000. Couples making more than $170,000 can’t claim the deduction at all.[ Jump to top ]
Historical trends: More and bigger claims
When first offered in 1998, the student loan interest deduction was only claimed on 3% of all individual returns, and the average deduction was $460. By 2017, the deduction was claimed on 8% of returns, and the average deduction had climbed to $1,089, reflecting increased limits and bigger debt loads carried by graduates.
Although the maximum allowable deduction has been increased twice, it was last adjusted nearly two decades ago. The maximum deduction was $1,500 in 1999 and $2,000 in 2000. The current limit of $2,500 was established in 2001. Since 2002, the income limits for claiming the adjustment have been indexed to inflation.
When first introduced, borrowers could only claim the student loan interest deduction for 5 years after taking out their loans. After the 5-year limit was eliminated in 2002, claims shot up by 51% to 6.64 million.
Today, the student loan interest deduction is claimed on more than 12 million tax returns each year, with annual deductions approaching $14 billion. Because the tax break on student loan interest is a deduction, rather than a dollar-for-dollar tax credit, it costs only a fraction of that to provide.
According to a 2018 White House budget estimate, the student loan interest deduction cost the government about $2.34 billion in lost tax revenue in 2017. That translates into an average savings of $186 among the 12.56 million individuals, households and families claiming the deduction that year.
In its latest budget proposal, the Trump administration estimates that the student loan interest deduction will cost the government $24.14 billion in lost tax revenue over the next decade.[ Jump to top ]
Why more people don’t claim the deduction
More than 40 million people have federal student loans, and you can also claim the student loan interest deduction if you’re repaying private student loans. That means fewer than one in three people with student loans are claiming the tax break.
Why don’t more people claim the deduction? Although some earn too much to qualify, the biggest reason is that most federal student loan borrowers aren’t paying any interest on their loans.
Among the 42.9 million people with federal student loans as of Sept. 30, 2019, only 19.3 million were in repayment. Another 8.8 million federal student loan borrowers were still in school or in their 6-month “grace period” after graduation, while 6.6 million had placed their loans in deferment or forbearance. Finally, 7.6 million federal student loan borrowers were in default.
Although most of the 19.3 million people who are repaying their federal student loans are claiming the deduction, some may not know about it, or rely on tax preparers who fail to claim it.
In a limited study published in 2014, the U.S. Government Accountability Office found that two out of 10 paid tax preparers failed to claim the student loan interest deduction in a test scenario. The GAO also analyzed 4 years of tax returns and found that 30% of people filling out their own taxes made an error when claiming the deduction, and that 34% of returns filed by paid tax preparers contained line-item errors.[ Jump to top ]
Married couples claim half of all deductions
Married couples filing jointly account for only about a third (35.8%) of all tax returns, but represent close to half (45.7%) of all claims for the student loan interest deduction.
Not only are married couples filing joint returns more likely to claim the deduction — 10.5% did so in 2017, compared to 7.6% of singles, and 5.7% of heads of household — but they’re awarded larger deductions. Married couples claiming the student loan interest deduction were able to deduct $1,154 from their income, on average, compared to $1,067 for single taxpayers and $897 for heads of household.
Because married couples are more likely to file claims and are awarded larger deductions, they captured 48.4% of student loan interest deductions awarded in 2017, totaling $6.63 billion.
Married couples can only claim the student loan interest deduction if they file joint returns. That means in some cases, both members of a marriage may be paying down student loan debt.
That’s one explanation for the higher prevalence of claims and bigger deductions awarded to married couples. But higher income limits — $170,000 for married couples, versus $85,000 for other taxpayers — are another factor.[ Jump to top ]
Millennials aren’t the only beneficiaries
Since they’ve borne the brunt of the increase in student loan borrowing, it’s no surprise that millennials claim the lion’s share of the student loan interest deduction.
Millennials ages 26 to 44 were granted $8.7 billion in student loan interest deductions in 2017, or 63.6% of the $13.69 billion in total claims.
But it’s important to note that tax filers 55 years older and older also claimed $1.66 billion in deductions, or 12.2% of the total. Often, older borrowers are repaying parent PLUS loans that they took out on behalf of their children. PLUS loans carry the highest interest rates and fees of any federal student loan, so the tax break on student loan interest can be valuable to older borrowers.[ Jump to top ]
Deduction is aimed at the middle class
Thanks to income phaseouts and caps, the student loan interest deduction is fairly well targeted at the middle class, with nearly two-thirds (63.3%) of deductions claimed by taxpayers earning $30,000 to $99,999.
However, about one-fifth (20.4%) of deductions go to families making $100,000 or more. Since those families are typically in higher tax brackets, the deduction is worth more to them.
Meanwhile, taxpayers earning less than $30,000 claim only a small share (16.4%) of deductions.[ Jump to top ]
Future of the student loan interest deduction
The Obama administration favored phasing out the student loan interest deduction, saying it would rather provide more targeted assistance that could help families avoid borrowing for college in the first place, such as an expansion of the American Opportunity Tax Credit. In addition, the Obama administration wanted to provide tax-free loan forgiveness to borrowers in income-driven repayment plans.
In 2017, House Republicans proposed simplifying the tax system by boosting the standard deduction and eliminating many itemized and above-the-line deductions, including the student loan interest deduction. But after input from the Senate, the bill that became law preserved the student loan interest deduction.
Today, some House Democrats want to eliminate income limits for claiming the tax break on student loan interest, and dramatically increase the maximum allowable deduction. A bill introduced last June by California Democrat Eric Swalwell, H.R.3098, has attracted 28 cosponsors, all Democrats. The bill would do away with income limits and increase the maximum deduction to $5,000 for single taxpayers and $10,000 for married couples.
In the Senate, Kentucky Republican Rand Paul has introduced legislation that would eliminate all limits on the student loan interest deduction — both income restrictions and the maximum allowable deduction. But so far, none of Paul’s Senate colleagues have thrown their support behind the bill, S. 1425.[ Jump to top ]
Claiming the student loan interest deduction after refinancing
The interest that racks up on student loans is one reason they can be so hard to pay off. If too much of your monthly payment is devoted to paying interest, rather than loan principal, it can take far longer to pay off your loans than the standard 10-year repayment term.
Refinancing student loans at lower interest rates can help borrowers pay down their loans faster. The interest you pay on student loans that you’ve refinanced or consolidated can still be deducted, as long as the new loan was used only to refinance qualified student loans. If the new loan exceeds the amount of the original loan, and you use the additional proceeds for anything other than qualified education expenses, none the interest on the refinanced loan is deductible.
But keep in mind that if you refinance federal student loans with a private lender, you’ll lose access to federal programs like income-driven repayment, which can provide loan forgiveness after 10, 20, or 25 years of payments.