Student loans can open the door to educational opportunities you otherwise wouldn’t be able to afford on your own. But once you have that hard-earned diploma in your hand (or perhaps displayed proudly on your wall), those same student loans often become a source of stress.
At tax time, there are a few ways to include your student loans while filing your taxes. And if you’re still in school, a few tax credits might help you as well.
What is the student loan interest deduction?
Taxpayers who pay interest on federal or private student loans may be able to take advantage of the student loan interest deduction. If you qualify for the deduction, you can reduce your taxable income by up to $2,500 per year.
The deduction, however, is set up so that the more income you earn, the less student loan interest you may be able to write off. Once your income reaches the limit set by the IRS, the deduction goes away altogether.
Student loan interest deduction limits for the 2019 tax year are as follows:
- Single, head of household, and qualifying widow(er): The deduction starts to phase out when your modified adjusted gross income (MAGI) reaches $70,000. At $85,000, the deduction disappears completely.
- Married filing jointly: The deduction phase out begins once your joint MAGI reaches $140,000. If your joint income surpasses $170,000, you can no longer claim the student loan interest deduction.
Note: You can’t claim the student loan interest deduction if your filing status is married filing separately.
How to get the student loan interest deduction
Unlike many other deductions, you don’t have to itemize your tax return to take advantage of the student loan interest deduction. Instead, you can claim the deduction as a straight adjustment to your income. As a result, you may be able to take advantage of this write off even if you take the standard deduction on your tax return.
Keep in mind, only the interest you pay on qualified student loans can be deducted (up to $2,500 maximum, depending on your income and filing status). The amount of money you pay toward your principal loan balance throughout the year is irrelevant.
When you pay at least $600 in qualified student loan interest, your lender should send you an IRS Form 1098-E (Student Loan Interest Statement). You can use this form to claim the student loan interest deduction when you file your taxes.
Not sure whether you qualify for the deduction? The IRS provides an online interview to help you figure out if you’re eligible.
Even if you think you might not qualify for the deduction, it’s worth the time to find out for sure. The student loan interest deduction could potentially save you hundreds of dollars on your tax obligation — lowering your tax bill or perhaps even boosting your tax refund.
6 more things to know about student loans and taxes
1. Filing as a dependent
If your parent is claiming you as a dependent, you cannot deduct student loan interest from your overall tax bill. Your parent, however, might be eligible to claim the deduction if he or she is listed as a borrower on your student loan.
If someone is helping you pay your student loans, like a parent or grandparent, and is not listing you as a dependent, you can still take advantage of the interest deduction.
2. Don’t fear the marriage penalty
The marriage penalty is an industry name for a total tax bill being affected by a married couple filing their taxes jointly. Often, joint filing can result in a higher total tax bill than if the couple filed separately.
There aren’t any situations where being married and filing separately would be beneficial while deducting student loan interest on taxes. In fact, married couples filing separately are not eligible for the student loan interest deduction.
3. Take advantage of relevant tax credits
While those still in school aren’t required to make payments toward their student loans, that doesn’t mean they can’t use their student status to their full advantage on their taxes.
There are two main tax credits for those who are still in school:
The American Opportunity Credit
The American Opportunity Credit is worth up to $2,500 per student per year, but can only be claimed four total tax years per student.
TheAmerican Opportunity Credit has strict qualifying requirements, including:
- The student must be attending school at least half-time for at least one academic term.
- The student must not have finished the first four years of a post-secondary program prior to the end of the tax year.
- The student must be pursuing a program that will end with a degree or other recognized credential.
Keep in mind, theAmerican Opportunity Credit is a tax credit, not a tax deduction. Although the two terms sound similar, the difference is significant. A $2,500 tax credit, which gives you a dollar-for-dollar reduction in what you owe the IRS, can save you far more money than a deduction of the same amount.
The Lifetime Learning Credit
The Lifetime Learning Credit, worth up to $2,000 per year, per student, has less strict requirements:
- There is no minimum on hours enrolled to qualify, and no limit to how many years the credit can be claimed.
- The credit covers tuition, books, fees and supplies for any student pursuing college or career education in the United States or, in some cases, abroad.
Like the American Opportunity Credit, the Lifetime Learning Credit is a tax credit rather than a deduction.
4. Avoid default at all costs
Not only can defaulting on a student loan hurt your credit and cost you extra money, defaulting has other potential consequences. Namely, your wages could be garnished and your tax refund withheld.
Your tax refund is at risk if you default on your loans, but this won’t happen if you take steps to set up a repayment plan or forgiveness program.
Student loans don’t go into default if you miss one payment. Typically 90 days after a federal student loan is past due, it’s reported to the three major credit bureaus and will likely begin to damage your credit scores. (Some lenders may report derogatory payments to the credit bureaus before the 90-day mark.)
After 270 days of nonpayment, federal student loans go into a status of default. Private student loans may be listed as in default sooner. Once you reach default status on a federal loan, it erases any eligibility for deferment, forbearance and forgiveness.
If you are struggling with student loan payments, consider calling your servicer to create a plan that will help you better manage the cost. You might be eligible for a hardship program, an income-based repayment plan, or settlement.
5. Don’t use 529 funds to make student loan payments
According to the U.S. Securities and Exchange Commission (SEC), funds in 529 plans can be used on a 100 percent tax-free basis when put toward qualified educational expenses, such as tuition and fees or room and board.
However, you cannot use 529 funds to make student loan payments. If you do, you’ll be hit with a 10 percent penalty and will be taxed on that money as income.
6. Received forgiveness? Get ready to pay
Student loans are not taxable as income.
However, if you are granted loan forgiveness, then you will likely be taxed on the total amount forgiven.
Keep in mind that loan forgiveness is not the same as loan discharge. Any student loan debt that is discharged due to death or total and permanent disability (TPD) is no longer taxable. This law is in effect for eligible loans discharged from Jan. 1, 2018 to Dec. 31, 2025.
Also, state loan forgiveness programs that increase the availability of health services in approved, underserved communities are currently tax free.
Resources for tax help with student loans
Overall, navigating student loans on your taxes can be tricky. Thankfully, there are plenty of resources available to help guide you through the process.
Those who want direct help from the IRS can access the 970 worksheet, titled “Tax Benefits for Education,” through its website. This worksheet outlines tuition reductions, how to claim credits, an explanation of the interest deduction and more.
Those who feel unsure of filing their taxes themselves should reach out to a certified accountant for help.