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Your Guide To The Student Loan Interest Tax Deduction

If you’ve enjoyed tax benefits for being a college student, you may be mourning the loss of those valuable credits now that you’ve graduated. But the upside of your educational investment doesn’t need to stop now: The government offers a special tax deduction for student loan interest, which could save you hundreds of dollars when you file this year.

As with most matters related to taxation, however, the fine print related to this deduction can seem pretty intimidating at first. That’s why we’re breaking down every aspect of this program, so borrowers can confidently claim this tax break to which they’re entitled. From determining whether you qualify to learning just how much you could save, this guide offers all the answers you need regarding the student loan interest tax deduction.


What is the Student Loan Interest Tax Deduction?

This program allows borrowers to deduct what they’ve paid in interest on their student loans from their tax burdens, subtracting up to $2,500 from their taxable income each year. This deduction applies not only to loans borrowers take out for themselves but also for interest paid on loans taken out for a spouse or dependent.

This program doesn’t just extend to those with federal loans – borrowers with private educational loans can also benefit from this deduction.

Do I qualify for the Student Loan Interest Tax Deduction?

To be eligible to take advantage of this program, you must meet a few simple criteria:

  • You must have paid interest on a qualified student loan during the tax year for which you’re filing.
    • A qualified loan is one you took out only to pay for expenses related to education for you, your spouse, or a dependent at an accredited school.
  • No one else can be claiming you as a dependent on tax filings.
  • If you’re married, you can’t be filing separately from your spouse.
  • Your modified adjusted gross income (MAGI) must be less than $80,000 individually or $160,000 for you and your spouse if filing jointly.
    • We know: “Modified adjusted gross income” sounds painfully complicated. Don’t worry – we’ll cover what that means in a moment.

If you’re still wondering whether you qualify, the IRS offers a helpful interactive questionnaire to determine if you’re eligible for the Student Loan Interest Tax Deduction. It takes about 10 minutes to complete.

How can I calculate my Student Loan Interest Tax Deduction?

Calculating your precise deduction can be a bit complicated, so here’s what you need to know about your potential savings.

First, you’ll need to determine how much you’ve paid in student loan interest this year.

Determining exactly how much interest you’ve paid:

  • If you’ve paid more than $600 in interest over the past year, your lender is required to issue “Form 1098-E” with you stating the total interest you’ve paid.
  • If you’ve paid less than $600 in interest, your total should be visible on your year-end statement. If you can’t find it for some reason, contact your lender or loan servicer to find out.
  • Additionally, unpaid interest that is added to your principal is also eligible for this deduction. For instance, perhaps your lender provides a six-month grace period following graduation in which you are not required to make payments, but interest is still added to your total amount owed. This unpaid interest should also be included, although it may not appear on your lender’s 1098-E form.
  • Finally, if your loan included an origination fee, that counts as interest as well. But for this deduction, that total must be spread evenly across the life of your loan. For instance, if your 10-year loan included an $800 origination fee, you can deduct $80 each year.

Next, you’ll need to calculate your Modified Adjusted Gross Income (MAGI). This figure is your total taxable income plus any nontaxable income or deductions. To determine this total, take the following steps:

Calculating your Modified Adjusted Gross Income (MAGI)

  • Find your Adjusted Gross Income or your total income with deductible expenses subtracted. You can find this number on line 37 of your 1040 tax return form.
  • Add back any deductions or nontaxable income not reflected in that total. These additions would include tax-free items such as the following:
    • IRA contributions
    • Passive income or losses
    • Tuition deductions
  • The resulting total is your MAGI.

Finally, we’ll use your interest paid and MAGI to determine just how large your deduction could be. The maximum possible deduction is $2,500, regardless of how much you make or how much interest you’ve paid this year.

Calculating your Student Loan Interest Deduction

  • If your MAGI is less than $65,000 or $130,000 jointly with your spouse, your deduction will be the total interest you’ve paid on your student loans or $2,500 – whichever is less.
  • If your MAGI is between $65,000 and $80,000 individually, or $130,000 and $160,000 individually, you’ll be subject to a phaseout. This means your deduction will be less than the full amount of interest you’ve paid.
  • To calculate your deduction after this phaseout, take the following steps:

Calculating Your Deduction Under the Phaseout

Step 1

Take the amount of interest you’ve paid this year, up to $2,500. We’ll call this total “A.”

Step 2

If you’re an individual, subtract $65,000 from your MAGI. If you’re filing jointly with your spouse, subtract $130,000 from your joint MAGI. We’ll call this total “B.”

Step 3

If you’re an individual, select $15,000. If you’re filing jointly, select $30,000. We’ll call this number “C.”

Step 4

Now, perform this calculation:

A x (B/C) = Your Student Loan Interest Deduction

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Let’s demonstrate this process with an example: You’re filing as an individual, and your MAGI is $70,000 a year. You’ve paid $600 in student loan interest this year.

Step 1

You’ve paid $600 in interest. That’s total “A.”

Step 2

Your MAGI is $70,000 this year. So total “B” is $5,000 ($70,000 - $65,000)

Step 3

You’re filing as an individual, so you select $15,000 for total “C.”

Step 4

Now, perform this calculation:

$600 x ($5,000/$15,000) = $200, your Student Loan Interest Tax Deduction

How much can I actually save using the Student Loan Interest Tax Deduction?

Unfortunately, your deduction amount won’t simply be subtracted from the total taxes you pay. While tax credits do precisely that, a tax deduction simply lowers the total income you’ll be taxed on. That means your ultimate savings depend on the tax bracket in which you fall, which refers to the percentage of your taxable income you’ll need to pay to the government.

For example, say your taxable income places you in the 25% tax bracket, and you receive a $200 student loan interest tax deduction. Ultimately, that deduction will save you $50 (25% of $200) in taxes you’d otherwise have to hand over to the IRS.

Can I still use this Student Loan Interest Tax deduction if I’ve refinanced my debt?

Refinancing your student loans with a private lender can often yield valuable savings on interest in the long run. Thankfully, it won’t necessarily disqualify you from taking advantage of this deduction.

If you refinance for a larger loan total than your original education debt, however, you may lose your eligibility for this deduction. This is particularly true if you use this additional money for expenses unrelated to your education. For this reason, it’s probably a better idea take out a separate loan for these other expenses if necessary.

How do I claim this Student Loan Interest Deduction when I file my taxes?

You don’t need to itemize this deduction when filing your taxes because it qualifies as an adjustment to your taxable income instead. Accordingly, you can enter this deduction directly on your 1040 tax form without touching the itemized deduction “schedule A” tax form.

If you’re uncomfortable with this process or simply want another perspective when determining your deductions, we recommend that you seek out the assistance of a tax specialist.

Saving beyond tax season

We hope this article helps you utilize this deduction to the best of your ability, enjoying the tax break you’ve earned simply by paying interest. But even if this program puts some extra cash in your pocket at the end of the fiscal year, you can still go further when it comes to saving with student loans. For many borrowers, refinancing student debt with a qualified, reputable lender can translate to lower monthly payments and massive interest savings over time.

Let Nitro be your source for the best options and information related to student debt. From expert reviews of refinancing lenders to savvy repayment strategies, we’ll help you take charge of your financial future.

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