Student Loan Tax Deduction – Everything You Need to Know

Lori Waddell

6 years ago

If you have received student loans for your education, you are probably curious about student loan tax deduction?

Do you have to pay taxes on student loans? Can you write off the interest? What else do you need to know about student loan tax deduction?

The Student Loan Tax Deduction

If you have student loans, you might be able to have a special deduction for the interest you paid on a student loan used for your higher education.
To qualify for this, your MAGI (modified adjusted gross income) needs to be less than $85,000 and $170,000 if filing a joint return for your 2021 taxes.
The amount of your student loan interest deduction is phased out if your MAGI is between $70,000 and $85,000 or between $140,000 and $170,000 if you are filing a joint return for your 2021 taxes.
The deduction can reduce the amount of your income subject to tax by up to $2,500 or up to the amount of interest you have paid, whichever is the smaller amount. This will be claimed as an adjustment to your income. You can still claim this even if you don’t itemize your deductions on Schedule A (Form 1040.)
You must have taken your student loan out for qualified educational expenses only and the loan couldn’t have been made under a qualified employer plan or from someone you are related to. Qualified Education Expenses are tuition and fees, room and board, books, supplies, and equipment as well as other necessary expenses such as transportation.
The student must be you, your spouse, or your dependent and you must be enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential at an eligible educational institution. A dependent is considered a qualifying child or relative.
Usually, any accredited public, nonprofit, or proprietary (privately owned profit-making) university, vocational school or other post-secondary educational institution qualifies.
The educational institution must be eligible to participate in a student aid program administered by the US Department of Education.

What Else Qualifies As Student Loan Interest?

The loan origination fee, the one-time fee charged by the lender when the loan is made, can also be deducted. This will be included on any 1098-E student loan interest statement received after September 1, 2004.
Capitalized interest, which is unpaid interest on a student loan that was added by the lender to the outstanding principal balance of the loan. This is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction is allowed in a year in which no loan payments were made.
Interest on revolving lines of credit, which is when the student uses a line of credit, including credit cards to pay for qualified education expenses.
You can claim interest on a loan that was solely used to refinance a qualified student loan of the same borrower. This can also include a single consolidation loan used exclusively to refinance two or more qualified student loans of the same borrower. If you happen to refinance a qualified student loan for more than your original loan and you use the additional amount for anything other than qualified education expenses, you can’t deduct any interest paid on the refinanced loan.
You can’t claim the interest that you paid on a loan if under the terms of the loan you aren’t legally obligated to make interest payments. You can’t claim loan origination fees that are payments for property by the lender such as commitment fees or processing costs. You also can’t claim any interest paid on the loan through your participation in the National Health Service Corps Loan Repayment Program or other loan repayment assistance programs.
You can’t deduct interest on a student loan on any amount that would be allowed as a deduction under any other provision of the tax law.

Canceled Or Forgiven Loans

If you are responsible for making loan payments, and the loan is canceled or forgiven, you might have to include that amount in your gross income for tax purposes.

There are exceptions to this which will make the canceled or forgiven loan, tax-free.

For example, if you have used the Public Service Loan Forgiveness and Teacher Loan Forgiveness Program. If you do need to report that as income, it would be on a 1099-C.

Remember, if you have paid student loan interest, you should be able to deduct the interest amount if you make less than $85,000 or $170,000 filing jointly.

Make sure you know if the interest you have paid qualifies, and be prepared to pay taxes on any student loans that have been canceled or forgiven.

You should receive a Form 1098-E Student Loan Interest Statement if you have paid $600 or more in interest on a qualified student loan.

Please make sure to visit the IRS website so that you have the most current and up-to-date information about what is required when it comes to student loans and taxes.

Tax laws change often and what is law this year could be different the next.