How to Get a Student Loan Tax Deduction

Homeowners, business owners, and college students can all take advantage of a variety of special IRS provisions to save money on their taxes. But what about student loan borrowers?

It's great that college students can qualify for tax breaks. But, for many students, it's not until leaving school that they begin to really feel the financial burden of their education expenses as this is when most start to repay their student loans.

Are those student loan costs tax-deductible? Are there any student loan tax deductions or credits that borrowers can take advantage of? In this post, we’ll cover what student loan tax breaks may be available to you.

Are student loans tax deductible?

The good news is that, yes, you might be able to claim a student loan interest deduction for the interest you paid on a qualified student loan in 2020. The bad news is, like most good things, there are conditions.

The student loan interest deduction allows borrowers to deduct up to $2,500 of the interest they paid during the tax year on a qualified student loan. To be eligible for the full $2,500 deduction in the tax year 2020 (filed in 2021), your Modified Adjusted Gross Income (MAGI) can't exceed $70,000 (for singles) or $140,000 (for married, filing jointly).

But, as explained below, you may still qualify for a smaller student loan interest deduction if your income exceeds these limits.

How the student loan tax deduction works

If you fit the bill, the interest you paid last tax year on a qualified student loan could result in a student loan tax deduction. A “qualified student loan” is defined by the IRS as a loan used solely to pay for higher education expenses.

However, the student loan interest deduction may be reduced depending on your income. If your MAGI falls between $70,000 and $85,000 or if you jointly file and your Modified Adjusted Gross Income (MAGI) is between $140,000 and $170,000, the amount you can deduct will be reduced based on a specific formula.

In other words, there will be a phaseout — a fancy term for an incremental reduction in how much you can deduct — as your income increases. So, in short, if your MAGI is more than $85,000 or $170,000 if filing jointly, unfortunately, you don’t qualify for the student loan interest deduction.

Your tax filing status can also impact your eligibility. Taxpayers with a married, filing separately filing status are not eligible for the student loan interest deduction. Also, you can't claim the deduction if someone else has claimed you as a dependent on their return. And your spouse can't be claimed as a dependent by someone else either.

Related: How to Decide When to Use Married Filing Separately on Your Tax Return

A word about deductions vs. credits

As noted above, there is a student loan tax deduction for student loan interest. But there is no student loan tax credit. The terms ‘deductions’ and ‘credits’ sometimes are used interchangeably but they’re not the same.

With tax deductions, eligible expenses are claimed as an adjustment to income. This can ultimately lower how much you owe. Tax credits provide a dollar-by-dollar reduction on your taxes so tax credits are technically better than deductions — but hey, you take what you can get.

How much is the student loan interest deduction worth?

Based on that little tutorial, you now know that deductions aren’t fully worth the numerical value. Instead, they help to lower your taxable income.

So, how much is the student loan interest deduction actually worth then? If you’re in the 22% tax bracket and eligible for the full $2,500 adjustment to income, you can save as much as $550 on your tax bill.

Want to know exactly how much you may be able to save with the student loan interest deduction? Check out our Student Loan Interest Deduction Calculator!

How to claim the student loan tax deduction

To claim the deduction for student loan interest, you’ll need Form 1098-E from your loan servicer. This proves to the IRS that you paid interest on a loan that was solely used to pay for higher education expenses.

If you don’t have it, follow-up with your loan servicer to get the exact numbers. You’ll only get this form if you paid more than $600 (which let’s face it, is pretty easy to do). If the amount of interest you paid is less than $600, contact your loan servicer so they can tell you how much you paid.

As you go through your tax return, you’ll use Form 1098-E to process your student loan interest deduction. If you use an online tax return preparer, this can be pretty easy. But if you have questions, you may want to reach out to a tax specialist.

What if you don’t qualify?

It can be a bummer to learn that you don't meet the income or filing status criteria for the student loan tax deduction. But that doesn't mean you have zero options for saving money on student loan interest.

While it’s not a student loan tax deduction or student loan tax credit, here are two ways to reduce the amount of interest you pay.

1. Sign up for autopay. Federal student loan borrowers can get a 0.25% interest rate reduction when signing up for autopay.

2. Refinance. Through the process of student loan refinancing, you may be able to get an even better interest rate than you currently have. In some cases, you can save thousands of dollars. And the impact on your taxes might not matter, depending on your situation.

Consider if refinancing is right for you and see if you qualify for any cash-back bonuses when you refinance. This could be a good option if you earn a good income and want to lower your interest rate.

Take action on your student loans and tax return

The student loan tax deduction is a great way to turn your higher education expenses into tax savings. If you're able to claim the deduction, consider putting the money you saved back toward your student loan payments. That way you can get out of debt faster and make the most out of your student loan tax return. If you don’t qualify, don’t fret, and consider autopay or refinancing student loans to save money on interest.

Did you know about these student loan interest deduction options?