You’ll most likely qualify for the deduction if:
You meet the modified adjusted gross income (MAGI) requirements for a full or partial deduction. You took out and used the loan to pay for qualified education expenses only. You were the person who took out the loan. The student loan debt was for you, your spouse, or someone who was a dependent when you took out the loan. Your filing status isn’t married filing separately.
The income limits are adjusted for inflation, so they can change from year to year. There are some other important exclusions. You can’t deduct interest on loans taken out by someone else, including a relative. Nor can you deduct interest from a retirement plan loan, even if the funds were used exclusively for qualified educational expenses. Additionally, parents can’t use this deduction if they took out a loan to help pay a non-dependent student’s tuition.
Who Is Eligible for the Student Loan Interest Deduction?
To take advantage of this deduction, the borrower must meet the following requirements:
You are legally obligated to repay the qualified education loan. You paid interest on a qualified student loan in the year you claimed the deduction. Your filing status is single, head of household, married filing jointly, or qualifying widow(er). Your modified gross adjusted income falls within the limits allowed. No one can claim you as a dependent on someone else’s tax return. Your higher education institution qualifies to participate in a financial aid program from the U.S. Department of Education.
How Do I Take the Student Loan Interest Deduction?
If you paid $600 or more in interest, each student loan servicer is required to send you a 1098-E form reporting the amount of interest you paid by January 31. You should also be able to download your 1098-E from your loan servicer’s website. Use your form(s) to calculate how much you can deduct. (You can still claim interest amounts lower than $600; you’ll just need to ask your servicer for the amount you paid or consult your own records.) Enter the total amount of eligible interest you paid that year in line 21 on Schedule 1 (Form 1040). If you paid less than $2,500 in interest, your deduction is whatever amount you ended up paying. If you paid more than $2,500 in interest, you can still only claim $2,500 for the deduction.
Student Loan Interest Deduction Example
To understand how much the student loan interest deduction can save you on your tax bill based on your income level and tax bracket, you can use a simple calculation. Let’s take a look at how it would work for a sample borrower. (Note that we’re not including the standard deduction or other adjustments here):
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is worth up to $2,500 for each qualifying student. This tax credit also phases out at certain income levels, but qualifying taxpayers can claim it for the first four years of post-secondary education. Use Form 8863 with either IRS Form 1040 or Form 1040-SR to claim this credit.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is designed to help you cover tuition and related expenses. You’re most likely eligible for this credit if you’re taking college courses; are working on an undergraduate, graduate, or professional degree; or are taking classes to improve your job skills. The LLC is worth up to $2,000 per year (20% of your first $10,000 of qualified expenses per year). To claim this credit, your MAGI must not exceed $90,000 or $180,000 if you’re filing jointly. Use Form 8863 to file.
Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account allows you to put aside up to $2,000 a year for a student’s education expenses (elementary, secondary, college or career school). The contributions are not tax-deductible, but the distributions are tax-free as long as they are used for qualified educational expenses. These accounts can only be opened for someone who is under 18 or who has special needs.
529 Plan
A 529 plan, also known as a qualified tuition program or QTP, is a tax-advantaged college savings program established by your state or school that allows anyone who is at least 18 and has a Social Security number (parents, other relatives, or the student themselves) to prepay or save ahead of time for education-related expenses. The contributions made to this plan are not tax-deductible, but some states offer additional tax breaks for parents who contribute to their child’s 529 plan. The money in a 529 account is invested, and earnings grow tax-deferred until the money is withdrawn. If the withdrawals are used to cover qualified educational expenses, they will be tax-free.
