The Student Loan Interest Deduction: Are You Eligible?

While education is a valuable investment, no one likes student loan debt. It’s a long-term expense that can make it harder to achieve milestones like buying a home or saving for the future.

But now that you’re out of school and paying taxes, there is one benefit you can get from your student loan payments. You can take advantage of the student loan interest deduction offered by the federal government to lower your tax bill.

A tax deduction lowers your taxable income. The student loan interest deduction lowers your income (on paper), which lowers the amount you owe, so you pay less in taxes.

You may be asking yourself if you’re eligible for the deduction. 

Well, if you’re curious about your eligibility and want to learn more about writing off student loan interest, as well as other ways you can lower your income tax bill, read on.

Can You Claim the Deduction?

The student loan interest deduction is yours to claim if:

• You paid interest on a qualified federal and/or private student loan during the tax year (January – December). Qualified loans also include grad school loans, like the Grad PLUS loan, and parent loans, like the Parent PLUS loan or qualified private student loans.
• You took a qualified loan out for yourself, your spouse or a dependent.
• Your loan was used to pay for tuition and other eligible expenses (like fees, textbooks, supplies and equipment) for an enrolled student at an eligible college or institution.
• You’re filing your taxes as single or jointly (if you’re married). You won’t qualify if you’re married filing as single.
• No one can claim you or your spouse as a dependent. 

If you still have questions about your eligibility, you can get answers on the IRS website, or you can talk to your tax advisor or preparer. 

How Much Student Loan Interest Can You Deduct?

You can deduct up to $2,500 in interest payments on your loans. (FYI: The principal can’t be deducted.)

The good news is that the deduction applies whether you’re using standard deductions or itemizing your deductions.

Standard deductions^[1]

For the 2023 tax year, the standard deductions are: 

• $13,850 (single taxpayers and married individuals filing separately) 
• $20,800 (heads of households / couples or families with only one income) 
• $27,700 (married couples filing jointly) 

If your other deductible expenses don’t exceed the standard deduction, you’ll want to use the standard deduction. In this case, you deduct the student loan interest in addition to the standard deduction amount.

Itemized deductions

If you have lots of expenses to deduct (think: charitable contributions, mortgage interest payments or self-employed health care expenses) you might decide to file with itemized deductions. In this case, the student loan interest deduction can be included along with your itemized deductions.

Does Income Affect Your Ability To Deduct Student Loan Interest?

The amount you can deduct is based on your modified adjusted gross income (MAGI) and your filing status.

MAGI is your adjusted gross income (taxable income) after you deduct health insurance premiums, retirement account deductions, any wage garnishments, child support payments and other pretax deductions. 

This is then modified by adding back contributions to traditional IRA retirement accounts, social security payments, interest from certain savings bonds or losses from passive income.

If your MAGI is:

• $70,000 or less ($140,000 or less if you’re married and filing jointly): You can deduct the full amount of the student loan interest you’ve paid (up to $2,500).
• More than $85,000 ($170,000 if married and filing jointly): You can no longer claim the student loan interest deduction.
• $70,000 – $85,000 ($140,000 – $170,000 if married and filing jointly): Your tax deduction is phased out based on your income. 

If your gross adjusted income falls between the minimum ($70,000 individual and $140,000 joint filer) and the maximum ($85,000 individual and $170,00 joint filer), you’ll need to apply the IRS phasedown formula to figure out how much you can claim for your deduction.^[2]

Here’s how this would look IRL:

Let’s say you paid $2,500 (the full deduction amount) in student loan interest this year, your MAGI is $75,000 and you’re filing as single. 

You would multiply the student loan interest ($2,500) by your MAGI ($75,000) then subtract it from the minimum income limit ($70,000). Next, you’d divide the result by the maximum income limit ($85,000) and subtract that result from the minimum income limit ($70,000).

For you visual learners and PEMDAS fans out there (IYKYK), it looks like this:

$2,500 X ($75,000 – $70,000 / $85,000 – $70,000) or ($5,000 / $15,000) or 0.33 = $825

Subtract $825 from the $2,500 you paid in student loan interest, and you’ll get a grand total of $1,675 to deduct from your income. #MathForTheWin

How Do You Know How Much Interest You’ve Paid?

If you’ve paid more than $600 in student loans for a tax year, your loan servicer has to send you a 1098-E form. It details how much you’ve paid in interest. Once you’ve got that information, you can plug it into your tax prep software or hand it to your tax preparer.

If you didn’t receive the form or you’re not sure if you’ve paid more than $600, you can also get that information from your student loan servicer’s website.

Why Does the Student Loan Interest Deduction Matter?

It matters because it can save you money. If you want to know how much you could save, take your deduction and multiply it by your tax bracket percentage.

Let’s say you paid $1,000 in student loan interest and your MAGI was $60,000. That would put you in the 22% tax bracket. The deduction would lower your taxable income by $1000, so you’d save ($1,000 x 22%) $220 on your taxes.

How Does COVID Affect Your Student Loan Interest Deduction?

In March 2020, as a result of the economic toll of the coronavirus pandemic, the federal government froze federal student loan payments. Loan interest rates were set to 0% and debt collections stopped on defaulted student loans. ^[3]

The good news is that federal student loan holders didn’t have to worry about paying their loans during a pandemic. The not-so-good news is that if you chose not to make payments, you couldn’t take advantage of the student loan interest deduction.

Education Tax Credits: Other Ways To Save on Education

To help college students and their families, the government offers two tax credits. Tax credits reduce the amount you owe in taxes. And, depending on the tax credit, it may even put some money in your pocket!

American opportunity tax credit (AOTC)^[4]

The AOTC gives you a $2,500 tax credit for qualified undergraduate expenses made during your first 4 years in school. 

For 2021, if your MAGI is:

• $80,000 or less ($160,000 or less if you’re married and filing jointly): You can claim the full tax credit.
• More than $90,000 ($180,000 if married and filing jointly): You can no longer claim the deduction.
• $80,000 – $90,000 ($160,000 – $180,000 if married and filing jointly): Your deduction is phased out based on your income. (You can figure out your deduction using the same IRS phasedown formula.)

If the tax credit brings the amount of tax you owe to $0, up to 40% ($1,000) of the remaining amount can be refunded to you.

Lifetime learning credit (LLC)^[5]

This tax credit offsets the cost of tuition if you go back to school to earn a degree or take courses to boost your career prospects.

The LLC gives eligible students at qualifying schools a maximum tax credit of $2,000 per tax return for eligible tuition and school expenses.

You can use the money for undergraduate, graduate or professional training courses, and there’s no cap on the number of years you can claim the credit.

FSince 2021, if your MAGI is:

• $59,000 or less ($118,000 or less if you’re married and filing jointly): You can claim the full tax credit
• More than $69,000 ($138,000 if married and filing jointly): You can no longer claim the deduction.
• $59,000 – $69,000 ($118,000 – $138,000 if married and filing jointly): Your deduction is phased out based on your income. (You can figure out your deduction using the same IRS phasedown formula.)

FYI: The LLC isn’t refundable. You don’t get anything back once you’ve zeroed out your tax bill.

Choose Your Savings With Care

You can claim a student loan interest deduction, AOTC or LLC tax credit on the same tax return – just not for the same student or the same qualified expenses.

So, if you’ve got student loans and your spouse is going back to school, you can take advantage of the student loan interest deduction, and your spouse can take advantage of either of the two tax credits (even if you file as a couple). 

That can help cut your tax bill. And it might put some money back in your pocket.

Whatever you decide, make sure you include your student loan information and education expenses when you file your tax return or share them with your tax preparer.