The Student Loan Interest Deduction was introduced in 1997 as part of the Taxpayers Relief Act. This program aimed to ease the financial burden of student debt.
While so much has happened in the student loan sector since then, this tax benefit has helped millions of borrowers reduce their taxable income, making loan repayment slightly more manageable.
With the US tax system being a bit tricky, students can easily make mistakes that could lead to forfeiture of this tax benefit. We’ve prepared this guide to help you avoid these mistakes and understand what it takes to access this financial relief.
Key Takeaways
- Deduct up to $2,500 in interest paid on qualified student loans yearly.
- Eligibility depends on income limits, loan type, and tax filing status.
- MAGI determines if your deduction is full, partial, or completely phased out.
- Use Form 1098-E and Schedule 1 to properly claim the deduction on taxes.
Student Loan Interest Deduction: What Is it and How Does it Work?
A student loan interest deduction is simply a tax benefit.
If you’re eligible, you can deduct up to $2,500 of interest paid on qualified student loans from your taxable income each year.
This deduction is classified as an above-the-line adjustment. In other words, borrowers can claim it even if they do not itemize deductions on their tax return.
This directly reduces your taxable income, which lowers your overall tax burden.
It applies only to interest payments made on loans taken specifically for higher education expenses like tuition and fees, books, and room. However, there are income limits and several eligibility requirements that determine taxpayers who can claim the full benefits or if it’s phased out based on their earnings.
As with every tax process, things can sound complicated quickly, so let’s break down how it works in a few simple steps.
- First, you’ll need to understand and determine your eligibility
- Then, check the income limit. It’s subject to change, so it’s best to always confirm
- Gather Form 1098-E, which reports the total interest you paid during the year
- Finally, report the qualified interest amount to claim the deductions
It’s also good to understand that this is not a tax credit, so it doesn’t directly reduce the amount of tax you owe, just the income on which you’re taxed.
Eligibility Criteria: How Do You Know You Qualify for Deduction?
There are six major criteria listed by the IRS to qualify for tax deduction on your student loan payments.
1. You Must Have Paid Interest on a Qualified Student Loan
Since your deduction is based on the interest you’ve paid, this criterion is vital. Also, the loan purpose must fit as an education expense, like tuition, fees, books, supplies, room and board, etc. Expenses such as food or transportation aren’t covered under this definition.
The loan must also be for yourself, your spouse, or your dependent at the time it was taken.
Your lender must be legitimate—personal loans from family or employers do not qualify.
2. Eligible Filing Status
Not all filing statuses qualify for this deduction. For instance, you cannot file as “Married Filing Separately.” If you’re married, you must file as “Married Filing Jointly,” in which case, both spouses’ income is considered for the deduction.
3. Dependent Clause
If your parents or someone else claims you as a dependent, you’re not eligible to take this deduction. However, you should know that there are several criteria before you can be claimed as a dependent.
For instance, if your parents or sponsors pay for more than 50% of your expenses, they can claim you.
4. Your Income Must Be Within the Allowed Limits
To better understand this, we must look into the IRS phase-out limits.
As a taxpayer’s income increases beyond a certain threshold, the IRS gradually reduces their tax benefit until it reaches zero at a specified income level. This gradual reduction is what’s known as a phase-out.
For the student loan interest deduction, the phase-out applies based on your Modified Adjusted Gross Income, MAGI (the next section explains more about MAGI).
If your income is within the phase-out range, you can only claim a partial deduction. However, you lose eligibility completely if your income exceeds the upper limit.
Student Loan Interest Deduction Phase-Out Limits
| Filing Status | Full Deduction (MAGI Below) | Phase-Out Range | No Deduction (MAGI Above) |
| Single, Head of Household, or Qualifying Widow(er) | $80,000 | $80,000 – $95,000 | $95,000 |
| Married Filing Jointly | $165,000 | $165,000 – $195,000 | $195,000 |
| Married Filing Separately | Not Eligible | Not Eligible | Not Eligible |
5. The Loan Must Be for Eligible Education Institutions
Unfortunately, some institutions do not qualify as eligible to participate in a US Department of Education student aid program. Loans for non-degree programs, unaccepted institutions, or foreign schools without proper recognition may not qualify.
The IRS states that an eligible educational institution must:
- Be a college, university, vocational school, or another postsecondary institution
- Be eligible to participate in the Federal Student Aid program under Title IV of the Higher Education Act.
You can also confirm your school’s eligibility through the federal school code list. Use the Federal Student Aid School Lookup tool to search your school. If it appears, it is eligible for federal aid programs.
6. You Must Have Made Payments During the Tax Year
The deduction applies only to interest paid during the tax year–not just accrued interest. Voluntary interest payments made during deferment or while you were in school may still qualify.
MAGI: What Is Modified Adjusted Gross Income?
Your modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) with certain deductions or exclusions added back. The IRS uses MAGI to determine eligibility for various tax benefits, including the Student Loan Interest Deduction, Roth contributions, and Premium Tax Credits for health insurance.
For most people, MAGI is the same as AGI or slightly higher because it includes income adjustments that AGI does not.
How to Calculate MAGI
Start with Your Adjusted Gross Income (AGI)
AGI is found on Line 11 of Form 1040 (US Individual Income Tax Return). It includes total income (wages, self-employment income, rental income, etc.) minus deductions like student loan interest, IRA contributions, and educator expenses.
Add Back Certain Deductions
The IRS requires adding back specific deductions to get MAGI. For the student loan interest deduction, the main add-backs include:
- Foreign earned income exclusion
- Foreign housing exclusion or deduction
- Excluded US savings bond interest
- Excluded employer-provided adoption benefits
The Result is Your MAGI
If you’ve checked and you don’t have any of the above exclusions, MAGI is the same as AGI.
Example Calculation
| Item | Amount ($) |
| Total Income (Wages, Business, Investments, etc.) | 80,000 |
| Minus: Adjustments (Student Loan Interest, IRA Deduction, etc.) | -2,500 |
| AGI (Line 11 of Form 1040) | 77,500 |
| Plus: Foreign Income Exclusions (if any) | 0 |
| MAGI | 77,500 |
In this example, your MAGI is 77,500, which is below this phase-out lower limit. In other words, you can claim your full deduction.
How to Claim a Deduction When Filing Your Taxes
To ensure you get the deduction when filing your taxes, follow the steps below.
Check Eligibility
Check your MAGI and confirm it’s within the income limits. Also, confirm that you’ve not been claimed as a dependent and that you legally owe the student loan.
Get Your Form 1098-E
This form is otherwise known as the Student Loan Interest Statement. You’ll get one from your loan servicer if you paid $600 or more in student loan interest during the tax year. If you paid less, log in to your loan servicer’s website to find the interest amount.
Enter the Deduction
To do this, use Form 1040 (US Individual Income Tax Return). Enter the student loan interest deduction amount on Schedule 1, Line 21 (Additional Income and Adjustments to Income). The deduction directly reduces your taxable income, meaning you do not need to itemize deductions.
If your MAGI is below the phase-out range, you can claim the full deduction of $2,500. However, if it’s within the range, you’ll need to calculate a reduced deduction using the formula below.
Reduced Deduction = Maximum Deduction × [(Upper Limit – MAGI) ÷ Phase-Out Range]
For instance, a single filer with a MAGI of $85,000 pays $2,500 in interest. $85,000 is in the phase-out range ($80,000 – $95,000).
Calculating your reduced deduction
Reduced Deduction = 2,500 × [(95,000 – 85,000) ÷ 15,000] = 2,500 × (10,000 ÷ 15,000)
Reduced Deduction = $1,667
This is the amount you should enter in your Form 1040 in this case.
File Your Tax Return
When filing, attach Schedule 1 to Form 1040 and enter the final deduction amount on Line 10 of Form 1040. Keep Form 1098-E for your records in case of an IRS audit.
Top Resources to Learn More
Understanding how to claim your student loan interest deduction involves several important tax concepts. Here are top resources to learn more about student loans and taxation.
Student Loan Professor also offers up-to-date information and news on developments in the student loan sector. You can bookmark this site to always access it easily.
If you’re having trouble claiming your deduction on your tax return, check out our financial advice services. Our trusted partners are experts in tax planning.
Brandon Barfield is the President and Co-Founder of Student Loan Professor, and is nationally known as student loan expert for graduate health professions. Since 2011, Brandon has given hundreds of loan repayment presentations for schools, hospitals, and medical conferences across the country. With his diverse background in financial aid, financial planning and student loan advisory, Brandon has a broad understanding of the intricacies surrounding student loans, loan repayment strategies, and how they should be considered when graduates make other financial decisions.
