Student loan interest deduction

Is student loan interest tax deductible?

If you’re wondering, “Is student loan interest tax deductible?” we’ve got some good news. Yes, you can deduct the interest you pay on your student loans from your taxable income. This deduction can help reduce the amount of income you’re taxed on, which may lower  your overall tax bill and potentially result in a bigger refund. Both federal and certain private student loans qualify for this deduction.

Who can take the student loan interest deduction?

To qualify, you must meet several requirements.

• You must file as single, head of household, qualifying widow(er), or married filing jointly to qualify for the student loan interest deduction. You cannot be married filing separately.
• You must have taken out the loan to pay for qualified education expenses, like tuition, fees, room and board, books, supplies, and other necessary costs, on behalf of yourself, your spouse, or your dependent.
• The student must be enrolled at least half-time in a program that leads to a degree, certificate, or other educational credential recognized by the IRS.
• You cannot take the student loan interest deduction if you’ve been claimed as a dependent on someone else’s tax return.
• Whether you’re a student or a parent, you must be responsible for and have paid the interest on the student loan during the tax year. For example, if your parents are directly repaying a student loan you took out, neither you nor your parents are eligible to claim the deduction.

Income limits for the student loan interest deduction eligibility

How to calculate student loan interest deduction

You don’t need a student loan interest deduction calculator to figure out how much student loan interest you can deduct from your income tax. Here's a step-by-step guide, along with a quick example to illustrate the process.

1. Get your Form 1098-E - Your loan provider will send you Form 1098-E if you paid $600 or more in interest during the year. This form shows the total amount of interest you paid on your student loans.
2. Total up your interest - If you have multiple student loans or different providers, you might receive several Form 1098-Es. Add up the interest amounts from all forms to find out the total interest you paid during the year.
3. Know the deduction limit - The maximum amount you can deduct is $2,500. If your total interest paid is more than $2,500, you can only deduct up to this limit.
4. Check income limits - Your ability to deduct student loan interest depends on your income. For single filers, the deduction starts to phase out and completely drops off at different modified MAGI limits.
5. Use the IRS worksheet - The IRS provides a worksheet to help you calculate your reduced deduction if your income is within the phase-out range. Follow the steps in the worksheet to determine your eligible deduction amount.

Here’s an example 

Let's suppose you're a single taxpayer with a MAGI of $83,000 who paid $1,200 in interest on a student loan. Because your income exceeds the threshold of $80,000 for a full deduction, you need to calculate your partial deduction. Here’s how.

1. First, calculate how much your income exceeds the lower end of the phase-out range.
   $83,000-$80,000=$3,000
2. Next, calculate the total phase-out range.
   $95,000-$80,000=$15,000
3. Now, determine the fraction of the phase-out range your excess income represents.
   $3,000/$15,000 =0.2
4. Multiply this by the total interest you paid to find the disallowed interest.
   $1,200×0.2=$240
5. Subtract the disallowed interest from the total interest paid to find the amount you can deduct.
   $1,200-$240=$960

In this example, you can deduct $960 of your student loan interest.

Additional tax breaks for students  

The student loan interest deduction is not the only tax break available for students. There are other valuable tax credits designed to help offset the costs of higher education. Two of the most significant credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). These credits can provide much-needed financial relief for students and make pursuing an education more affordable.

American Opportunity Tax Credit

The AOTC is designed to help students and their families offset the costs of higher education, and it provides up to $2,500 for each eligible student per year for the first four years of college.

Here’s what you need to know

• To qualify, the student must be enrolled full-time for any part of five months of the year in a program that will lead to a degree, certificate, or other educational credential that’s recognized by the IRS.
• The credit can be applied to tuition, fees, and course materials required to enroll or attend, even if you didn’t purchase them through the school. Housing, insurance, medical expenses, and transportation do not qualify.
• You cannot claim the AOTC if the student has completed the first four years of higher education before the tax year, you have claimed the credit for four years already, or the student has a felony drug conviction at the end of the tax year.
• The AOTC is partially refundable, which means if the credit brings your tax bill to zero, you can get 40% of any remaining amount of the credit (up to $1,000) refunded to you.
• The credit is based on up to $4,000 of qualified expenses not covered by scholarships or grants or other tax-free education monies. The first 60% of expenses up to $2,000 are allowed in full, and the remaining 40%, up to $2,000, is limited to 25% of expenses paid.
• The AOTC is a per eligible student credit. This means each taxpayer or dependent on the tax return may be eligible for the credit.

Income limits for the AOTC

Lifetime Learning Credit

The LLC is another valuable tax benefit for students. Unlike the AOTC, there is no limit on the number of years you can claim the LLC. This credit provides up to $2,000 per tax return to help cover the costs of higher education. This means no matter how many students are eligible for the credit, only $2,000 in credit is allowed on the tax return.

Here’s what you need to know

• The LLC is available for all years of postsecondary education and for courses to improve job skills. The student does not need to be enrolled at least half-time to qualify.
• The credit can be applied to any tuition and fees required for you to enroll or attend. Course-related books, supplies, and equipment are eligible, but you must purchase them from the school as a condition of enrollment or attendance.
• There is no limit on the number of years you can claim the LLC for yourself, your spouse, or your dependent.
• The credit is based on 20% of eligible expenses up to $10,000 per year.

Income limits for the LLC

Get more help with student loan tax deduction from a Jackson Hewitt Tax Pro

Taking the student loan interest deduction can help you lower your income tax bill and keep more of your hard-earned money. The best part? You don’t have to figure out your student interest deduction alone. 

Work with a Tax Pro who can help you get the most out of your student loan interest deduction and get you every credit and dollar you deserve.