Written By Meagan McGuire, CFP®, ChFC®, CSLP®
Updated on August 1, 2024
It’s tax time! The student loan interest deduction is a topic of conversation around this time of year. Tax topics can be pretty dry, so let’s skip to the skinny — here's what you need to know about deducting student loan interest this year.
The basics of student loan interest deduction
Your eligibility for the student loan interest deduction depends on your modified adjusted gross income (MAGI). There's also no double benefit allowed. Here's what I mean:
Modified adjusted gross income (MAGI) limits
The amount of your student loan interest deduction gradually reduces (called a phaseout) if your MAGI is between $70,000 and $85,000. Income limits increase to $140,000 to $170,000 if you file a joint return.
You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint return).
No double benefit allowed
The IRS is cracking down on “double-dipping.” Therefore, you can't deduct as interest any amount that is an allowable deduction under any other provision of the tax law.
You also can't deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program. The earnings are treated as tax-free because they were used to pay student loan interest.
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What’s the same about the student loan interest deduction this year?
A few things remained the same as last year, such as:
- The maximum deduction is $2,500
- This is an above-the-line deduction, so you can reap the benefits even if you take the standard deduction and don't itemize.
- If your filing status is married filing separately, you can’t take this deduction at all.
- If you file taxes married jointly and both spouses have student loan payments, you can only deduct up to $2,500. In other words, the deduction doesn’t double even with a higher amount of interest paid between both partners.
When to claim the student loan interest deduction
You can claim the student loan interest deduction if all of the following apply:
- You paid interest on a qualified private student loan or federal student loan*.
- You're legally obligated to pay interest on a qualified student loan.
- You or your spouse, if filing jointly, can't be claimed as dependents on someone else's return.
*According to the IRS, a qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
- For you, your spouse or a person who was your dependent when you took out the loan;
- For education provided during an academic period for an eligible student; and
- Paid or incurred within a reasonable period of time before or after you took out the loan.
IRS Publication 970, Tax Benefits for Education for use in preparing 2021 tax returns. It's extremely helpful to read through all the technicalities for more information. Another cool tool is this Interactive Tax Assistant questionnaire. It helps taxpayers determine if they can deduct the interest paid on a student or educational loan for previous tax year(s).
Here are two more tips on what to know about the student loan deduction:
- Your student loan servicer or lender should send you a Form 1098-E, Student Loan Interest Statement, if they received interest payments of $600 or more on one or more qualified student loans. This tax form will tell you how much you can deduct.
- This deduction is reported on Schedule 1 of the borrower’s income tax return.
Common misconceptions about the student loan interest deduction
Taxes — especially deductions — can be complicated, and the student loan interest deduction has a few misconceptions:
- The deduction’s cost savings to you may not be as significant as you think. So, don’t be upset if you now make too much money to be able to deduct student loan interest on your federal income tax. Definitely don’t keep your student loan debt around for this purpose.
- A tax deduction is not the same thing as a tax credit. A deduction reduces your taxable income, whereas a credit reduces your actual tax bill dollar-for-dollar.
- If you have a $0 monthly payment on your federal loans because you're enrolled in an income-driven repayment plan, you can't claim the student loan interest deduction. This is because you didn't actually pay any interest.
Where to get help for the student loan interest tax deduction
Consider working with a professional on your taxes if you’re unsure how to take full advantage of all the tax breaks that you can. We are the go-to for figuring out your student loan and tax integrated strategy, but for actually filing your taxes, we suggest tax affiliate ben@magnitaxexperts.com. Reach out and mention us to get the special Student Loan Planner® discount.
Do you feel confident in your overall student loan plan? If not, schedule your custom student loan plan consultation with us.
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SLP Wealth, LLC (“SLP Wealth”) is a registered investment adviser registered with the United States Securities and Exchange Commission with headquarters in Durham, NC.
