Tax Deductions for Student Loans
With some limitations, you can deduct student loan interest on your federal tax return.
If you meet certain requirements, on your tax return you can deduct some or all of the interest you pay on your qualified student loans. How much you can deduct will depend on:
- the amount of qualified student loan interest you pay, and
- your income.
(Learn more about student loan debt.)
What Part of Your Student Loan Payment Can You Deduct?
If you meet certain eligibility requirements, federal tax laws allow you to deduct the interest payments you make on qualified student loans on your tax return. In most cases, the following qualify as deductible student loan interest payments:
- simple interest payments
- loan origination fees (but usually not those related to processing costs or commitment fees)
- capitalized interest payments (unpaid interest that the lender adds to your principal loan balance)
- interest payments on credit card debt or other revolving lines of credit if you only used the line of credit to pay for qualified education expenses (discussed below)
- interest payments on refinanced student loans
- voluntary interest payments (such as interest payments you make during deferment of your student loan payments).
Are You Eligible to Deduct Your Student Loan Interest?
In general, you may be eligible to deduct your student loan interest payments if:
- you paid interest during the year on a qualified student loan (discussed below)
- your filing status isn’t married filing separately
- your modified adjusted gross income is less than $75,000 if you are single or less than $155,000 if you are married and filing jointly (these figures reflect 2013 income thresholds and are adjusted periodically to account for inflation), and
- someone else doesn’t claim you (or your spouse if you are filing jointly) as a dependent on his or her tax return.
What Is a Qualified Student Loan?
You can only deduct interest payments that you make on qualified student loans. Yours is a qualified student loan if you:
- used all of the loan money to pay for qualified higher education expenses that you, your spouse, or your dependents incurred as an eligible student (enrolled at least half-time in a degree program), and
- didn’t get the loan from a related person (such as a family member or certain business entities or trusts) or under a qualified employer plan.
What Are Qualified Higher Education Expenses?
Qualified higher education expenses typically include tuition, fees, room and board, books, supplies, and other necessary expenses associated with attending a college, university, or other eligible postsecondary educational institution (an educational institution is generally considered eligible if it can participate in a U.S. Department of Education student aid program).
Student Loan Interest Deduction Limits
Deducting your student loan interest payments can lower your taxable income and reduce your tax liability. But there are limits to how much you can deduct.
Maximum Amount of Student Loan Interest You Can Deduct
In 2013, the maximum amount of student loan interest you can deduct is the lesser of:
- the actual amount of student loan interest you paid during the year, and
- $2,500 (this amount is adjusted periodically).
Student Loan Interest Deduction Phaseout
If you are single and your modified adjusted gross income is between $60,000 and $75,000 (or between $125,000 and $155,000 if you are married and filing jointly), your student loan interest deduction will be gradually phased out (reduced) (these income amounts reflect 2013 figures and are adjusted periodically). The IRS uses a specific formula for the phaseout. Here’s how it works.
The student loan interest deduction phaseout formula. To arrive at your reduced student loan interest deduction, you first subtract $60,000 (or $125,000 if married and filing a joint return) from your modified adjusted gross income and divide this figure by $15,000 (or $30,000 if married and filing jointly) to calculate a fraction. Then, you multiply your maximum allowed deduction (discussed above) by this fraction and subtract the result from the maximum deduction amount to calculate your reduced deduction.
Example. Kate paid $3,000 in qualified student loan interest in 2013. Her maximum allowed deduction before the phaseout reduction is capped at $2,500. Kate is single and her modified adjusted gross income was $63,750 in 2013. Because her income is between $60,000 and $75,000, her deduction will be reduced. To calculate her reduced deduction, we subtract $60,000 from $63,750 (which is $3,750) and divide this figure by $15,000 to come up with a fraction (which equals .25 in this case). We multiply her maximum allowed deduction of $2,500 by .25, which gives us $625 (this is the amount by which her deduction will be reduced). Finally, we subtract $625 from her maximum deduction of $2,500 to arrive at $1,875, which is the student loan interest deduction she can claim on her 2013 tax return.
How Do You Know the Amount of Interest You Paid on Your Student Loans?
If you make $600 or more in student loan interest payments to a lender during the year, it must send you a student loan interest statement called Form 1098-E. In most cases, Form 1098-E will provide the exact amount of student loan interest you paid to that lender.
If you got your loan before September 1, 2004, your lender is only required to include the simple interest you paid on Form 1098-E. This means that the lender may not include other types of payments (such as loan origination fees or capitalized interest) on the form. Even if these are not included on Form 1098-E, you can still deduct them if they qualify as student loan interest payments.