Student loans are a great tool that you can use to make getting an education affordable. And once you start to repay your student debt, your student loans may be able to help you save money on your taxes.
However, student borrowers preparing to file their taxes in 2021 (for the 2020 tax year) are facing a different set of circumstances than usual. Federal student loan relief efforts have put payments and interest on hold for millions of borrowers, and many private lenders have offered hardship programs as well, so some borrowers may not be able to claim the usual deductions.
So, how will these unique situations affect your upcoming tax return? Read on to learn more about what to expect as a student loan borrower when you file your taxes this year.
What is the student loan interest deduction?
The student loan interest deduction allows eligible borrowers to deduct up to $2,500 in student loan interest fees from their taxes each year. It’s considered an “above the line” deduction because it reduces the amount of your taxable income.
You don’t have to itemize to take advantage of the student loan interest deduction. (This is good news for anyone who wants to keep it simple and take the standard deduction on their tax return.) But in order to qualify, you must meet certain criteria.
According to the IRS, to qualify for the student loan interest deduction:
- You must be legally obligated to pay interest on a qualified federal student loan.
- You must have paid interest on a qualified (private or federal) student loan.
- Married taxpayers must file jointly with a spouse.
- No one else can claim you (nor your joint-filing significant other) as a dependent on their tax return.
IRS income limits
In addition to the requirements above, your modified adjusted gross income (MAGI) also needs to fall below a certain threshold to claim the full amount (up to $2,500) of your student loan interest deduction. If your MAGI falls between $70,000 and $169,000, you may only be eligible for a partial, phased-out deduction depending on your filing status.
IRS income limits for this deduction vary based on your tax filing status as follows.
|Filing status||Potentially eligible for full deduction||MAGI phaseout begins||MAGI cutoff point for any deduction|
|Single||Less than $70,000||$70,000||$85,000|
|Head of household||Less than $70,000||$70,000||$85,000|
|Qualifying widow(er)||Less than $70,000||$70,000||$85,000|
|Married filing jointly||Less than $140,000||$140,000||$170,000|
|Married filing separately||Ineligible||Ineligible||Ineligible|
Can you still claim the student loan interest deduction in 2021?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent extensions in student loan relief efforts put payments and interest fees on pause for millions of federal student loan borrowers. Thanks to President Biden’s latest executive order, administrative forbearance is available to eligible borrowers through Sept. 30, 2021.
Naturally, you can’t deduct interest fees that you didn’t pay. Yet you may still be able to deduct student loan interest on your tax return if:
- You paid interest before administrative forbearance went into effect. The CARES Act didn’t implement payment and interest delays until March 2020.
- You opted out of the CARES Act payment suspension. If you continued to make federal student loan payments despite the payment and interest flexibility available, you may be eligible for a deduction.
- You paid interest on private student loans. Private student loans were not included in the CARES Act relief efforts.
Not sure whether you qualify to deduct student loan interest on your tax return? It might be a good idea to talk to a tax expert. The IRS also provides a helpful online tool you can use to see if you can claim the student loan interest deduction. You can visit the IRS website and complete the online interview to see if you’re eligible.
Once you determine that you are eligible to claim the deduction, the process isn’t complicated. As long as you paid $600 or more in student loan interest, your student loan servicer should send you a Form 1098-E (via mail or email). Your servicer should also send a copy of this form to the IRS. From there, you can give the form to your tax preparer or include the deduction on the tax return you’re filing on your own.
If you can’t claim the student loan interest deduction (or if the amount you’re able to deduct is smaller this year), try to look on the bright side. There’s a good chance that you saved far more money this year through your payment and interest pause than you would have saved by claiming the deduction.
Finally, remember that the student loan interest deduction isn’t the only way to save money on taxes. You can also research to see if you qualify for education tax credits, like the American Opportunity Tax Credit and the Lifetime Learning Credit.