Depending on your tax bracket, claiming the student loan interest deduction can save you as much as $550 on your annual tax bill.
There are a few conditions to meet, but if you do qualify, it’s easy to take advantage of because you don’t need to itemize your deductions. Here’s everything you need to know about claiming the student loan interest deduction.
In this post:
- What is the student loan interest deduction?
- Eligibility for the student loan interest deduction
- Claiming the student loan interest deduction
- What qualifies for the deduction
- Documents you need to file your tax return
- How much you can save
- Frequently asked questions
What is the student loan interest deduction?
The student loan interest deduction can take some of the sting out of the interest you pay on your student loans each year. If you’re carrying the average student loan debt of $34,000 at a typical interest rate of 4.8%, you’re paying about $1,500 a year in interest.
Luckily at tax time, you may be eligible to subtract up to $2,500 in student loan interest payments from your income and earnings, reducing the adjusted gross income (AGI) that you’re taxed on. You can claim the student loan interest deduction regardless of whether you itemize your deductions or take the standard deduction.
The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for 2018, to:
- $12,000 if you’re filing singly
- $18,000 if you’re the head of your household
- $24,000 for married couples filing joint returns
As a result, about nine out of 10 taxpayers are better off taking the standard deduction. The good news is that if you take the standard deduction, you can also claim the tax break on student loan interest payments. No wonder more than 12 million Americans claim about $13 billion in deductions each year for student loan interest payments.
Eligibility for the student loan interest deduction
You can’t claim the student loan interest deduction if your modified adjusted gross income (MAGI) exceeds certain limits. For most people, your modified adjusted gross income (MAGI) is simply your adjusted gross income (AGI) before any adjustment for student loan interest payments.
For the 2018 tax year, the modified adjusted gross income limits were:
- $80,000 if single, head of household, or qualifying widow
- $165,000 if married and filing a joint return
In addition to income limits, you can’t claim the deduction if:
- Your parent or another relative claims you as a dependent on their own taxes
- You or your spouse are not legally responsible for repaying the loan (you’re making payments on a loan that your child took out in their own name, for example)
- You’re married and filing separate returns
Claiming the student loan interest deduction
To claim the student loan deduction, enter the allowable amount on line 33 of Schedule 1 on Form 1040.
The student loan interest deduction is an “above the line” income adjustment on your tax return. That means you can claim it regardless of whether you’re claiming the standard deduction or itemizing deductions.
If you’re using tax preparation software like TaxAct, it will do much of the work for you. Here’s what you need to know if you need help calculating the allowable amount to enter on line 33.
1. Find out how much interest you paid
To find out how much interest you paid on your student loans during the tax year, look for the Form 1098-E, Student Loan Interest Statement from your loan servicers. Any loan servicer that collected at least $600 in interest from you is required to send you a Form 1098-E by Jan. 31, either electronically or by mail.
If you paid at least $600 in interest during the tax year but made payments to multiple servicers, you can request a Form 1098-E from each servicer — even if they collected less than $600 in interest from you. If you paid less than $600 in student loan interest, you can contact each of your servicers for the exact amount of interest paid during the tax year.
2. Calculate the reduction in your taxable income
You can deduct up to $2,500 in student loan interest payments from your taxable income unless your income approaches or exceeds the eligibility limits.
For the 2018 tax year, the student loan interest deduction gradually phases out for taxpayers whose modified adjusted gross income (MAGI) is between:
- $65,000 and $80,000: If your filing status is single, head of household or qualifying widow
- $135,000 and $165,000: For married couples filing jointly
Remember, your MAGI is typically equal to your adjusted gross income (AGI) before the student loan interest deduction is applied. If your income falls within the windows above, there’s a formula for calculating your reduced loan interest deduction. Use the Student Loan Interest Deduction Worksheet in Form 1040, or see chapter 4 of IRS Publication 970, “Tax Benefits for Education.”
What qualifies for the deduction
Interest paid on a loan will typically qualify for the student loan interest deduction if the loan was taken out for the sole purpose of paying the qualified educational expenses for you, your spouse, or a dependent while attending an eligible school. Loans provided by relatives or employers don’t qualify for the deduction.
Qualified educational expenses include:
- College tuition and fees
- Room, board, and other living expenses
- Textbooks, supplies, and equipment
- Other necessary expenses like transportation
Colleges, universities, and vocational schools are eligible schools if they are approved to participate in a student aid program administered by the U.S. Department of Education.
Documents you need to file your tax return
Here are the documents you’ll need to file your tax return and claim your deduction:
- W-2: If you were employed in a job and paid income tax, you’ll need a W-2 from each of your employers to file your taxes accurately. You’ll also need W-2s from any provider of taxable scholarships, grants or tuition assistance.
- 1098-E: To claim the student loan interest deduction, get a 1098-E from any loan servicer you sent payments to, so you can document all of the interest that you paid during the tax year.
- 1098-T: To be eligible to claim the American opportunity credit or the lifetime learning credit, you’ll need a Form 1098-T, Tuition Statement, from your school.
How much you can save
How much the deduction can save you on your taxes depends on three factors:
- How much interest you paid on your student loans
- How much of that interest can be applied to reduce your taxable income
- The tax bracket you’re in
The maximum deduction is $2,500. So your taxable income will typically be reduced by the amount of student loan interest you paid in a tax year, or $2,500, whichever is less.
Keep in mind that the $2,500 maximum deduction is gradually phased out as your income approaches the overall eligibility limits. So if your income is close to the eligibility limits, you might have paid $2,750 in interest, but only be allowed to adjust your income by $1,250.
How to figure out your tax bracket
Here are the tax brackets for tax year 2019:
- 10%: for incomes of $9,700 or less ($19,400 for married couples filing jointly)
- 12%: for incomes over $9,700 ($19,400 for married couples filing jointly).
- 22%: for incomes over $39,475 ($78,950 for married couples filing jointly)
- 24%: for incomes over $84,200 ($168,400 for married couples filing jointly)
- 32%: for incomes over $160,725 ($321,450 for married couples filing jointly)
- 35%: for incomes over $204,100 ($408,200 for married couples filing jointly)
- 37%: for incomes over $510,300 ($612,350 for married couples filing jointly)
If you’re making enough to be in the 24% tax bracket or higher, you won’t qualify for the student loan interest deduction.
Here’s the MOST the student loan interest deduction could save you on your taxes in each of the qualifying tax brackets. Assuming you’re able to claim the full $2,500 deduction you could save:
- 10% tax bracket: $250 savings
- 12% tax bracket: $300 savings
- 22% tax bracket: $550 savings
So to calculate the amount you’ll save, multiply the amount your income is reduced by your tax rate. For example:
- If you’re in the 12% tax bracket: A $1,000 reduction in taxable income will only save you $120.
- If you’re in the 22% tax bracket: A $2,500 reduction in taxable income translates into a $550 tax savings. If you’re in a higher tax bracket, you won’t be able to claim the deduction at all, so $550 is the maximum benefit.
Frequently asked questions
Can I claim the student loan deduction for parent PLUS loans I took out for my children?
Yes, if you are paying interest on federal parent PLUS loans, or private parent student loans that you took out in your own name to pay for your children’s college expenses, you may be able to claim the interest deduction.
To claim the student loan deduction, you or your spouse must be legally responsible for paying the loan. If you’re making payments on loans that your children took out in their own name, you cannot claim the student loan interest deduction. Your children cannot claim the deduction either if they are listed as dependents on your tax return.
Can I claim the deduction on credit card debt?
Interest on credit cards and other revolving lines of credit may qualify for the student loan interest deduction, as long as the line of credit was used only to pay for qualified education expenses.
Can I still claim the deduction if I refinance my student loans?
Yes, 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.
Can I claim the deduction for interest paid on private student loans?
Private student loans qualify for the student loan interest deduction as long as they were used to pay for qualified educational expenses at an eligible school approved to participate in a student aid program administered by the U.S. Department of Education. But loans provided by your relatives or employers don’t qualify.
Do I need to file a tax return?
Whether or not you’re required to file a tax return depends on your age, income, and filing status (whether you’re single or filing a joint return with a spouse).
These requirements vary from year to year, but for the 2018 tax year you were required to file a return if your gross income was at least:
- Single: $12,000
- Married filing jointly: $24,000
- Married filing separately: $5
Even if you’re not required to file a tax return, the IRS recommends that you do. You may qualify for a refund of any federal income tax withheld and for tax credits like the American Opportunity Credit.
Can I be claimed as a dependent?
If your parents claim you as a dependent, you can’t claim the student loan interest deduction. Your parents, guardians, or other relatives who have stepped into that role, may list you as a dependent on their tax return if:
- You’re a full-time student 24 years old or younger
- You’re 19 or younger and your parents provide at least half of your financial support
- You’re any age and permanently and totally disabled
If I attend school in another state, do I have to file two state tax returns?
If you take a job and pay income taxes in a state that’s not your state of residence, you’ll probably have to file two tax returns: your regular state tax return, and a nonresident state tax return in the state where you go to school.
You’ll have to report the income you earned at school on both of your state returns. But your state of residence will typically give you credit for the taxes you paid as a nonresident in the state where you’re going to school, so you’re not double-taxed. Each state has its own rules, but your tax preparation software or a tax professional can help you sort them out.
Are there other education tax breaks?
If you or any of your dependents are still in school, there are two tax credits that can help you offset the costs of higher education by reducing the amount of income tax you owe:
- American Opportunity Credit: Lets you claim up to $2,500 per student per year for the first four years of school
- Lifetime Learning Credit: Lets you claim up to $2,000 to help pay for college tuition, as well as for required books and other supplies
A tax credit doesn’t just reduce the amount of income subject to tax — it reduces the tax itself, in some cases resulting in a refund.
For more information, check out chapters 2 and 3 of IRS Publication 970, “Tax Benefits for Education.”
Do I owe taxes on my scholarship?
Scholarships and grants don’t have to be reported as income if they’re used to cover tuition and fees at an eligible school where you’re pursuing a degree. You can also use a scholarship to pay for course-related expenses like books and supplies without triggering a tax obligation.
But any portion of a scholarship or grant that you use to pay for living expenses like housing and food is considered reportable income. The same is true for scholarship money spent on travel, research, clerical help, or equipment and expenses that aren’t required for enrollment — you must also report it as income.
You don’t have to file a tax return at all if your only source of income is a tax-free scholarship. But if any portion of your scholarship or grant funding is taxable, you have to file a tax return and report the taxable amount.