Student Loan Interest Deduction Definition and How To Claim It (2024)

What Is the Student Loan Interest Deduction?

The student loan interest deduction is a federal income taxdeduction that allows borrowers to subtract up to $2,500 of the interest paid on qualified student loans from their taxable income.

It is one of several tax breaks available to students and their parents to help pay for higher education. Individuals must meet certain eligibility criteria to qualify for the deduction and are subject to a student loan interest deduction phase out based on filing status and income level.

How the Student Loan Interest Deduction Works

The Internal Revenue Service (IRS) outlines the tax deductions that allow individuals to reduce their taxable income for the year. One of these is the student loan interest deduction, which allows for the deduction of up to $2,500 of the interest paid on a student loan during the tax year.

If your modified adjusted gross income (MAGI) is not more than $75,000, you can claim up to $2,500. The deduction amount is gradually reduced if your MAGI ranges from above $75,000 to less than $90,000. If your MAGI is $90,000 or more, you may not claim the deduction.

So, many individuals who fall in the 22% tax bracket should be able to take the full $2,500 deduction or the amount they actually paid in student loan interest, whichever is less.

Loans Eligible For the Deduction

Loans that are eligible for the deduction must meet certain qualifications. For instance:

• The student loan must have been taken out for the taxpayer, the taxpayer's spouse, or dependent(s). Parents who help legal borrowers with repayment cannot claim the deduction.
• The loan must be taken out during an academic period for which the student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential.
• The loan must be used for qualified higher-education expenses (tuition, fees, textbooks, supplies, and equipment) and cannot include room and board, student health fees, insurance, and transportation.
• The loan must be used within a “reasonable period” after it is taken out, and the proceeds must be disbursed either within 90 days before the academic period starts or 90 days after it ends.
• The school where the student is enrolled must be an eligible institution, including all accredited public, nonprofit, and privately owned for-profit post-secondary institutions that participate in the student aid programs managed by the U.S. Department of Education.

Requirements To Claim the Deduction

In addition, according to the IRS Publication 970 as quoted below, taxpayers who wish to claim the deduction must meet the following requirements:

• Your filing status is any filing status except married filing separately.
• No one else is claiming you as a dependent on their tax return.
• You are legally obligated to pay interest on a qualified student loan.
• You paid interest on a qualified student loan.
  

Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. This means that you don't have to fill out a Schedule A, which is used to itemize deductions, to claim it.

Special Considerations

As noted, you can deduct up to $2,500 of the interest you paid on an eligible student loan. If you paid less than that, your deduction is capped at the amount you paid. If you paid more than $600 in interest for the year, you should receive a Form 1098-E from the lending institution. If you don't receive it, you can download the form directly from the IRS website.

Income Limits for Eligibility

Also as referred to above, the student loan interest deduction is reduced or eliminated for higher-income taxpayers. For the 2023 tax year, the amount of your student loan interest deduction is gradually reduced or phased out if your modified adjusted gross income (MAGI) is between $75,000 and $90,000 for single taxpayers. It's between $155,000 and $185,000 for those who file married and jointly. You can’t claim the deduction if your MAGI is above the maximum amount.

Student Loan Interest Deduction vs. Other Breaks

Students enrolled in higher education programs and their parents may be eligible for other breaks, including tax credits, in addition to the student loan interest deduction.

Tax credits are even more valuable than deductions because they are subtracted from the tax you owe on a dollar-for-dollar basis rather than simply reducing your taxable income.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) allows taxpayers to receive a credit for qualified expenses paid for the higher education of an eligible student during their first four years at a post-secondary institution. The total credit is capped at $2,500 per student per year. Taxpayers receive 100% of the credit for the first $2,000 spent on expenses and 25% for the next $2,000 spent on that student.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) provides students with a maximum tax credit of $2,000 per tax return for qualified tuition and school-related expenses who are enrolled in an eligible post-secondary institution. This includes any qualified expenses used to pay for courses toward an undergraduate, graduate, or professional degree. There is no cap on the number of years that taxpayers can claim the credit.

There are three criteria that taxpayers must meet to claim the credit:

1. The taxpayer, their dependent, or another party pays for qualified higher education expenses.
2. The taxpayer, their dependent, or another party pays the expenses for an eligible student enrolled at a qualified institution.
3. The taxpayer is the student, their spouse, or a dependent listed on their tax return.

College Savings Plans

You can also get tax benefits by participating in a 529 Plan. This type of savings plan offers tax advantages to parents as they save for the education of their children. The Tax Cuts and Jobs Act (TCJA) of 2017 expanded the rules to include payment of up to $10,000 in annual tuition costs of K-12 programs at private, public, and religious schools.

The rules were expanded even further when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. This act allows account holders to use their plans to pay for costs associated with a beneficiary's approved apprenticeship program and to withdraw a lifetime maximum of $10,000 to apply to qualified student debt.

Student Loan Payment Suspensions

On March 13, 2020, then-President Trump suspended federal student loan payments, interest-free, indefinitely during the coronavirus crisis. President Joe Biden continued the pause until Sept 30, 2021, then until Dec. 31, 2022.

Subsequently, the pause on student loan payments was extended once again. Required payments resumed in October 2023.

The pause on federal student loan payments could mean that you may not have interest payments to deduct for your federal student loans.

Example of a Student Loan Interest Deduction

Here's a hypothetical example to show how student loan interest deductions work. Let's suppose you're a single taxpayer with a MAGI of $72,000 who paid $900 in interest on a student loan. Because you earned too much to qualify for a full deduction, you have to calculate your partial deduction. The first part of the calculation would be:

$\begin{aligned}\$900\times\frac{\$72,000-\$65,000}{\$80,000-\$65,000}=\$900\times\frac{\$7,000}{\$15,000}=\$420\end{aligned}$$900×$80,000−$65,000$72,000−$65,000​=$900×$15,000$7,000​=$420​

The $420 represents how much of your $900 in interest is disallowed. So as a final step, you'd subtract $420 from $900 to arrive at an allowable deduction of $480.

IRS Publication 970: Tax Benefits for Education includes a worksheet you can use to calculate your modified adjusted gross income and student loan interest deduction.

The Bottom Line

The student loan interest tax deduction allowed by the IRS can help reduce a borrower's taxable income by up to $2,500. A loan holder's income and filing status determine the point at which the deduction amount begins to phase out and ultimately becomes unavailable.