Skip to main content

Student Loan Interest Deduction: A Complete Guide

Published September 3, 2021

5 minute read

By Jim Greene

Under Internal Revenue Service (IRS) rules, taxpayers with active student loans are entitled to special deductions. These deductions apply to the interest paid on the loan in a given year. They help borrowers reduce the lifetime cost of their student loans by putting hundreds of dollars back into their pockets. However, the rules and the process for claiming these deductions are a tad complicated. This guide will explain the student loan interest deduction rules in detail.

Student Loans and COVID-19

First off, a word to borrowers holding federal loans back by the Department of Education (ED). In 2020, the ED announced an emergency program designed to help borrowers ease the financial sting of COVID-19. It included three major relief measures for people with active student loans:

The ED announced a final extension of the COVID-19 relief program on August 6, 2021. Loan payments, interest charges, and collections action on loans in default will resume as normal on February 1, 2022.

What Are the IRS Rules on Student Loan Interest Deductions?

Student loan interest deductions are explained in IRS tax topic number 456. The rules allow for up to $2,500 per year in tax deductions on student loan interest payments. To qualify, taxpayers must meet several conditions:

Thus, things will be a little complicated for the 2020 and 2021 tax years for borrowers of ED-backed loans. Thanks to the CARES Act, borrowers were temporarily relieved of their legal obligations to make loan or interest payments. However, this does not apply to people holding private student loans and loans not owned by the ED.

What Is A Tax Deduction?

Tax deductions apply to your taxable income. You can use them to reduce the amount of income subject to federal taxation. Let’s say you had $40,000 in taxable income and you paid $2,000 in interest on qualified student loans. After applying the $2,000 deduction, your taxable income would be $38,000.

People often confuse tax deductions with tax credits. Tax credits are not subtracted from your taxable income. Rather, they come off your tax liability — the amount of money you owe in taxes on your annual income. This IRS resource explains the difference in further detail.

What Other Rules Apply to Student Loan Interest Deductions?

The IRS applies several other eligibility rules to taxpayers seeking to deduct student loan interest from their tax deductions. First, you cannot claim the deduction if you are married but filing separately from your spouse. If you are jointly filing with your spouse, neither of you can appear as dependents on another person’s tax return. Finally, your household modified adjusted gross income (MAGI) must fall below specified cutoffs. These change each year, but for 2021 they run as follows:

Individual incomes above $70,000 but less than $85,000 still qualify for these deductions, but have reduced maximums. The same applies to couples with MAGIs above $140,000 but below $170,000. You can also claim deductions on mandatory and voluntary payments, up to the maximum that applies to your income level.

budgeting and tax forms

Shutterstock

Which IRS Forms Do You Need?

The IRS forms you’ll need to claim your deduction depend how much you paid in student loan interest. If you paid less than $600, you won’t get an IRS form from your lender. However, you can still claim the tax deduction. If you need help with this, speak to your student loan servicer or a loan specialist at your school.

If you paid more than $600, you will need IRS Form 1090-E. You’ll also need to submit IRS Form 1040 or 1040-SR.

IRS Form 1090-E

IRS Form 1090-E is also known as a Student Loan Interest Statement. If you pay more than $600 in interest on your student loan, you should receive one automatically. Your lender or loan servicer will also submit an identical copy directly to the IRS.

The Student Loan Interest Statement will state the exact amount of money you paid in loan interest during the year. You must cite the same figure on your tax return (IRS Form 1040/1040-SR).

IRS Form 1040/1040-SR

IRS Form 1040 is a U.S. Individual Income Tax Return statement. Its counterpart, Form 1040-A, was used until 2018. Form 1040-A has since been replaced by Form 1040-SR, also known as the U.S. Tax Return for Seniors.

Most people claiming tax deductions for student loan interest will use Form 1040. However, people age 65 and up may be eligible to claim these benefits if they:

For assistance completing your individual income tax return, refer to these IRS instruction guides for the relevant form(s).

What Other Tax Benefits Apply to Education?

If you don’t qualify to deduct student loan interest from your tax return, you might be eligible for other programs. The U.S. government offers several other tax breaks and benefits for higher education.

The most common examples include the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit (AOTC). You may also get a tax break if you funded your education through a 529 plan.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit is an IRS program that applies to tuition and other eligible education expenses. You can claim it for undergraduate and graduate degree programs, and for professional degree programs.

LLC benefits max out at $2,000 per tax return. You can claim the credit for any number of years as long as you qualify. However, you or your dependent must be actively enrolled in an eligible education program to get the credit.

American Opportunity Tax Credit (AOTC)

Students in the first four years of a qualified higher education program are eligible for the AOTC. Like the LLC, AOTC rules limit the credit to students actively enrolled in school. You cannot claim it after you’ve graduated.

The AOTC provides up to $2,500 in annual tax relief. One major advantage of this program is that you can receive cash benefits. If the AOTC reduces your income tax to zero, you can get a refund for up to 40% of the remaining credit.

piles of cash representing student debt

Shutterstock

529 Plans

Specialized 529 plans come in two types: education savings plans and prepaid tuition plans. Both types function in similar ways, as they shield deposited savings from taxation. Those funds can later be used to pay for tuition costs or other qualified educational expenses.

These plans get their name from Section 529 of the IRS code, which authorizes them. At least one type of 529 plan is available in every U.S. state and the District of Columbia.

The Bottom Line

Student loan payments are a bummer, but interest payment deductions from your income tax can ease their sting a bit. If you qualify, you can deduct up to $2,500 a year from your taxable income. This can translate into tax savings in the hundreds of dollars, depending on your tax bracket.

The rules surrounding these tax deductions are complex, with many limitations and exceptions. If you need help navigating them, enlist the services of a licensed accountant or qualified tax professional.

Jim Greene

Contributor

Jim Greene is a freelance writer based in the Toronto, Canada area. He has been writing professionally since 2001 and has an extensive professional background in consumer research, personal finance and economics.

Explore Student Loans

Young woman worried about student loans Perkins loans Student Loans

Perkins Loans: Everything You Need To Know

A Perkins Loan was a federal program that provided low-interest loans to college students who demonstrated exceptional financial need. The program, which operated as the “Perkins Loan Program,” no longer exists. It was discontinued on September 30, 2017. The final disbursements were permitted through June 30, 2018. Although the program has been discontinued, many current […]

Read More about Post Title

5 minute read

Man looks at Student Loan Notice Student Loans

Should You Count on Student Loan Forgiveness?

Now that January 20 has come and gone, there’s a new Democratic administration in the White House. We don’t want to get bogged down in the politics of the transition. However, President Biden taking office has many Americans hopeful he will do something to address the staggering student debt problem the country is facing. As […]

Read More about Post Title

4 minute read

See All In Student Loans

More from WalletGenius

Young couple worried about finances Save Money

How To Tell If Your Retirement Is In Jeopardy

One of the most common financial concerns for adults these days is retirement. It comes up over and over again. For anyone concerned about money, retirement is a very big problem to confront. Current (and future) generations of working-aged Americans aren’t exactly fairing well, when it comes to retirement savings. Some studies have shown that […]

Read More about Post Title

7 minute read

Young woman worried about student loans Perkins loans Student Loans

Perkins Loans: Everything You Need To Know

A Perkins Loan was a federal program that provided low-interest loans to college students who demonstrated exceptional financial need. The program, which operated as the “Perkins Loan Program,” no longer exists. It was discontinued on September 30, 2017. The final disbursements were permitted through June 30, 2018. Although the program has been discontinued, many current […]

Read More about Post Title

5 minute read

Capital budgeting paperwork Budgeting

Capital Budgeting: A Complete Guide

Capital budgeting is a business term used to describe the process of determining how to best use the capital the company has on hand. Should they expand? Should they reinvest in a new factory to increase capacity? Is it profitable to acquire another business for expansion? In other words, capital budgeting is the process of […]

Read More about Post Title

7 minute read

Woman checking her credit score Credit

What You Need to Know About Free Credit Scores

You probably know that your credit score is an important aspect of your finances. Your credit score goes beyond just helping you get a loan with a good interest rate. It can also influence your insurance rates and even impact what happens when you sign up for internet or a cell phone plan. Knowing your […]

Read More about Post Title

7 minute read

Budgeting

EBITDA: What Is It and How Is It Calculated?

It might look like it, but EBITDA is not actually an alien word. It is an acronym that stands for “earnings before interest, taxes, depreciation, and amortization.” As you may have guessed by now, it’s a metric used in the business world. A company’s EBITDA can help you better understand their ability to generate cash […]

Read More about Post Title

6 minute read

Trusted provider of accurate rates & financial information