The end result is that it reduces your adjusted gross income (AGI) so you pay taxes on less, and a lower AGI can directly affect your eligibility for numerous other deductions and tax credits as well.
Are You Eligible?
You can deduct interest on student loans paid by you if you use the single, head of household, or qualifying widow(er) filing status, or on loans paid by you or your spouse if you file a joint return. You can’t claim the student loan interest deduction if you file a separate married return or if you can be claimed as a dependent on someone else’s tax return. You must also be legally obligated to repay the loan. You—or your spouse if you file a joint return—must be the signatory on the loan. You can’t claim the deduction if your child takes out the loan in their own name and is the obligor, even if you make the payments for them. Only they can do so—provided, of course, that you’re not claiming them as a dependent.
Student Loans That Qualify
The loan must be a qualified student loan for the benefit of you, your spouse, or your dependent. Loans from a qualified employer plan don’t count, nor do private loans from family or friends. The loan proceeds must be entirely dedicated to qualified education expenses. You’ll lose the deduction if you borrow $10,000 but use only $9,000 of it toward qualified expenses and “cash out” the remaining $1,000. Qualified education expenses include:
TuitionRoom and boardBooks, supplies, and equipmentTransportationFees
How Much Is the Deduction?
The maximum student loan interest deduction you can claim is $2,500, and it might be less. It can be limited by your income. The deduction is reduced for taxpayers with modified adjusted gross incomes (MAGIs) in a certain phaseout range, and eventually is eliminated entirely if your MAGI is too high.
Student Loan Interest Deduction Phaseouts
The phaseout ranges for this tax credit depend on your filing status. You can deduct up to $2,500 in student loan interest if your MAGI is under the threshold where the phaseout begins. Your limit is prorated if your MAGI falls within the phaseout range—for example, $70,000 to $85,000 if you’re single. These figures are adjusted for inflation, so they can change slightly from year to year. The IRS typically announces inflation adjustments at the end of the tax year. For tax year 2023, those thresholds will increase.
How To Calculate Your Deduction
Calculating your deduction begins with your MAGI. This is your adjusted gross income (AGI) before you take other tax deductions into account, including the student loan interest deduction you’re hoping to qualify for. You can’t deduct this first before calculating your MAGI. That would be like claiming a tax break twice for the same expense. You must also add back the following exclusions and deductions if you took any of them, but these are somewhat uncommon:
The foreign earned income exclusionThe foreign housing exclusionThe foreign housing deductionThe income exclusions for residents of American Samoa or Puerto Rico
Divide your MAGI by $15,000 ($30,000 if married, filing jointly) after you’ve calculated it. Convert the answer to a decimal with three decimal places. Use 1.000 for the calculation if it’s more than 1.000. If it’s less than 1.000, use it as is. Next, multiply your student loan interest paid up to $2,500 by the decimal. The answer will be $2,500 or less. You won’t have to dig through all of your student loan statements for the year, trying to track down how much interest you paid. Your lender should send you a Form 1098-E sometime after the first of the year. The amount of interest you paid is reported in Box 1 of the 2021 version of the form.
