Refinancing your student loans can help you reduce your monthly payment and save a lot of money on student loan interest over the course of the loan. You may be wondering that in addition to the great savings refinancing can bring, will your student loan interest payments still be tax deductible?
Yes, even if you refinance, the interest payments made on your new student loan will still be tax deductible. Either $2,500 or the student loan interest you paid that year, whichever is smaller, is the maximum amount eligible for deduction.
Here are two criteria that could potentially change your eligibility:
1) To take the full $2,500 deduction, your modified adjusted gross income (MAGI) must be less than $65,000 ($130,000 on a joint return). There is currently a MAGI phaseout that allows those who make between $65,000 and $80,000 ($130,000 – $160,000 on joint return) to take a partial deduction. If your MAGI falls within the phaseout window, the formula for calculating your maximum deduction is here. A couple filing jointly with $145,000 in MAGI can claim a maximum deduction of $1,250, for example.
2) If you refinance your student loan for more than your original loan amount, the additional amount must be used to pay for education expenses such as tuition, room and board, book, supplies and transportation.
For more on claiming the student loan interest deduction, the American Opportunity Credit, and the Lifetime Learning Credit, see, “7 steps to claiming your student loan interest deduction.”
Editor’s note: Consult with your tax adviser, IRS and lender to determine your individual situation. Credible is a multi-lender marketplace that allows borrowers to request competitive loan offers from vetted lenders, without affecting their credit scores.