If you’ve taken out student loans to pay for your education, you’re not alone. In the U.S., a total of 43.4 million borrowers have student loan debt.
The good news is that the government helps lift the burden of debt for many borrowers. You can typically claim your student loan interest as a tax deduction when you file your income tax return.
Not sure how the tax deduction works or how to take advantage of it? Read on to learn more about tax deductions, tax credits and how you get back some of the money you spent on your hard-earned degree.
What Is the Student Loan Tax Deduction?
A student loan tax deduction lets you deduct up to $2,500 in student loan interest from your taxable income. Keep in mind that this deduction only applies to the interest, not the principal.
By lowering your taxable income, sometimes referred to as your adjusted gross income or modified adjusted gross income, you can lower the amount you’ll pay on your taxes.
How Does Student Loan Tax Deduction Work?
Let’s say you pay $400 a month in student loans (or $4,800 a year). Half of your payment ($2,400) covers the principal and the other half ($2,400) covers the interest on the loan.
Now it’s tax time. Your taxable income is $69,000. That puts you in the 22% federal tax bracket, which means you owe $15,180 to the IRS (that’s $69,000 X 0.22).
After you apply your student loan interest deduction, your taxable income reduces to $66,600, which means that now you only owe the IRS $14,520 (that’s $66,000 X 0.22). Your student loan interest deduction just saved you $660 on your taxes.
You can take advantage of the student loan interest deduction with both federal and private student loans. According to the IRS, student loan interest qualifies if the loan was used to pay qualified higher-education expenses that were:
- For you, your spouse, a child or other dependent
- For education received during your time as an eligible student
- Paid or incurred within a reasonable period of time before or after you took out the loan
There was a time when your parent(s) or guardian(s) might qualify for a deduction if they took out a home equity loan to pay for your education. But since the 2017 Tax Cut and Jobs Act, the deduction only qualifies on money spent buying, building or repairing a home.
To qualify for the tax deduction, you must meet specific income, tax status and loan criteria.
You can claim the student loan interest tax deduction if all of the following apply:
- You paid interest on a qualified student loan.
- Your taxable income is less than $85,000, and you file your taxes as single, head of household or qualified surviving spouse. Or you’re married and filing jointly, and your taxable income is $170,000 (married but filing separately doesn’t qualify)
- You’re filing jointly with your spouse and neither of you can be claimed as dependents on someone else’s tax return.
If your employer offers a benefit that helps pay off all or part of your student loans, you can’t deduct any student loan interest that was paid by your employer.
There are limits on the amount you can deduct, and those limits are based on your income.
You can deduct up to $2,500 in student loan interest payments if your taxable income is less than $70,000 (or $140,000 if you’re married and filing jointly).
If your taxable income is between $70,000 – $85,000 (or $140,000 – $170,000 if you’re married and filing jointly) the amount you can deduct will be based on your income.
To determine how much you can deduct, take the total interest paid and multiply it by:
- Single filers: Your taxable income minus $70,000 then divided by $15,000
- Married filing jointly filers: Your taxable income minus $140,000 then divided by $30,000
Here’s an IRL example for a single filer:
Let’s say you paid $1,000 in student loan interest last year, and your taxable income is $75,000.
- $75,000 – $70,000 (or $5,000 / $15,000 = 0.333 or 33%)
- Multiply $1,000 by 0.333 for a total of $333
- Subtract $333 from the $1,000 you paid in student loan interest
Your total deduction is $667.
Now, let’s say you’re married and filing jointly. You paid $2,500 in student loan interest last year, and your taxable income is $165,000.
- $165,000 – $140,00 (or $25,000 / $30,000 = 0.833 or 83.3%)
- Multiply $2,500 by 0.833% for a total of $2,083
- Subtract $2,083 from the $2,500 you paid in student loan interest
Your total deduction is $417.
How Do You Take the Student Loan Interest Deduction?
Taking the student loan interest deduction is surprisingly easy. Get a copy of your 1098-E tax form. It’s a student loan interest statement from your student loan servicer that reports how much you paid in student loan interest for the year. You can usually download it from their website, but they’re required to mail it to you.
Whether you’re doing your taxes or you’re handing everything over to a tax preparer, the student loan interest deduction is included as an adjustment to income. To claim the deduction, enter the amount on line 21 of your Schedule 1 form and attach it to your tax return.
You file your taxes with the IRS, and your deduction is claimed!
Other Tax Benefits for Higher Education
In addition to student loan interest deductions, there are also tax education credits available.
Dollar for dollar, a tax credit provides greater value than a tax deduction because it reduces the amount you owe on your taxes rather than deducting from your taxable income.
Plus, you, your parent(s) or your guardian(s) can take advantage of these tax credits while you’re in school.
There are two key tax credits to look out for.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a $2,500 tax credit for qualified education expenses you or your parents paid during the first four years of school.
The tax credit is good for 100% of the first $2,000 spent on qualified education expenses and 25% of the next $2,000 spent on qualified education expenses.
If you spent $3,000, you’d be entitled to $2,000 plus an additional $250 (25% of $1,000) for a tax credit of $2,250.
If the credit brings the amount of tax you owe to zero, you can keep 40% of the remaining amount credit refund up to $1,000.
So, if you owed $1,800 in taxes and you’re eligible for a $2,200 tax credit, you’d get an extra $160 (40% of $400) back with your tax refund.
To qualify for the AOTC you:
- Need to be enrolled at least half time for one academic period (one semester, trimester or quarter counts)
- Can’t earn more than $90,000 as a single filer or $180,000 if you’re married and filing jointly
- Can’t receive more in aid than you pay for your education
- Can’t be claimed as a dependent on someone else’s tax return (FYI: If your parent(s) or guardian(s) claim you as a dependent, they may be able to claim the credit on their tax return as long as they’re helping you pay for school. Your parent(s) or guardian(s) can claim the tax credit for each child they’re helping through school.)
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a $2,000 annual tax credit for qualified tuition and related school expenses that help pay for undergraduate, graduate, professional degree and continuing education courses. You can claim the credit for as many years as you’re eligible.
The LLC is intended for students who are going back to school to develop new skills. (FYI: The LLC also provides the tax benefit if you attend a school overseas.)
To qualify for the LLC:
- You must cover qualified education expenses for at least one course at an eligible educational institution.
- You can’t earn more than $69,000 as a single filer or $138,000 if you’re married and filing jointly.
- You must be paying for yourself, your spouse or a dependent you listed on your tax return.
Which education tax credit is right for you?
Both tax credits can help you lower your federal tax bill and even get you some money back. But which one is right for you?
The AOTC is probably a better option if you’re an undergraduate in your first four years of school and file your taxes separately from your parents.
BTW, you can’t double-dip. You can claim the AOTC or the LLC, but not both. And if you receive tax-free educational assistance, like a grant, you need to subtract its amount from your qualified education expenses. But you can still take advantage of both the tax credit and the student loan interest deduction.
Get That Money Back
If you’re paying for your higher education, either by shelling out for it now or repaying student loans later, you deserve to get something back for it. Take full advantage of the student loan interest deduction and every tax credit you qualify for.
Federal Student Aid. “Federal Student Loan Portfolio.” Retrieved March 2022 from https://studentaid.gov/data-center/student/portfolio
Internal Revenue Service. “Topic No. 456 Student Loan Interest Deduction.” Retrieved March 2022 from https://www.irs.gov/taxtopics/tc456
Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2022.” Retrieved January 2023 from https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
Internal Revenue Service. “Interest on Home Equity Loans Often Still Deductible Under New Law.” Retrieved March 2022 from https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
Internal Revenue Service. “2021 Publication 970.” Retrieved March 2022 from https://www.irs.gov/pub/irs-pdf/p970.pdf
Internal Revenue Service. “AOTC – American Opportunity Tax Credit.” Retrieved March 2022 from https://www.irs.gov/credits-deductions/individuals/aotc
Internal Revenue Service. “Compare Education Credits.” Retrieved March 2022 from https://www.eitc.irs.gov/other-refundable-credits-toolkit/compare-education-credits/compare-education-credits
Internal Revenue Service. “Lifetime Learning Credit.” Retrieved March 2022 from https://www.irs.gov/credits-deductions/individuals/llc
Federal Student Aid. “COVID-19 Loan Payment Pause and 0% Interest.” Retrieved March 2022 from https://studentaid.gov/announcements-events/covid-19/payment-pause-zero-interest