It’s possible to have excessive student loan debt. It becomes considerably more difficult to navigate the intricate world of student loan repayment. The burden can be lessened, though; you can apply for student debt forgiveness programs or claim a tax deduction for student loans.
You may qualify for the student loan interest tax deduction if you are required legally to pay interest on a student loan that’s qualified. Any interest paid on specific loans during the tax year, the IRS allows a deduction for it. Depending on your AGI, you are permitted a deduction of up to $2,500 here. Both private and public student loans are eligible for the deduction.
You can find every justification for deducting your student loan interest in the essay that follows and follow the rules to avoid an IRS notice or at least apply for a tax filing extension.
#1
Taxpayers who make student loan interest payments can first of all deduct those payments. It isn’t an itemized deduction but rather a change in income that is deducted from your taxable income in order to save you money.
Anyone who owes on student loans can therefore claim the deduction. The following prerequisites must be met, nevertheless, in order to be eligible:
- You accrued interest on an eligible student loan throughout the current tax year.
- If you have an eligible student loan, you must legally pay interest.
- You’re single and filing no separate returns
- You have a MAGI below a yearly cap that is established.
#2
Higher-income taxpayers no longer qualify for the student loan interest deduction, or it is lowered significantly.
This means that you can deduct less than the $2,500 maximum if your MAGI is between $70,000 and $85,000 ($170,000 if filing jointly). Through phaseout, the deduction gradually declines and ultimately disappears. Your filing status depends on the varying phaseout range.
| Filing Status | Phase-out Begins | Phase-out Ends |
| Married Filing Jointly | $140,000 | $170,000 |
| Qualifying Widow(er) | $70,000 | $85,000 |
| Head of Household | $70,000 | $85,000 |
| Single | $70,000 | $85,000 |
According to the information above, if your MAGI is less than the number at which the phaseout starts, you may be able to deduct up to $2,500 or the actual amount of student loan interest you paid, whichever is less. If your MAGI is between the phaseout range ($70,000 to $85,000 if you’re single) and the maximum, your limit is allocated.
#3
The student loan interest deduction is available for a range of student loans, including the following:
- Federal Stafford loan that is subsidized
- Unsecured Federal Stafford loan
- Federal Perkins Loan
- Government Student PLUS Loan
- A Federal Parent PLUS Loan
- Government Consolidation Loan
- Student loans from the state
- Personal loans for students
For student loans that you obtained for yourself, your spouse, or a dependent, you are eligible to deduct the interest you paid. In addition to federal student loans, it applies to all other loans taken out to cover higher education costs. $2,500 a year is the maximum deduction.
Additionally, all of your admissible educational expenses are covered by the student loan interest deduction, which also includes your tuition. Following are a few examples of acceptable educational costs:
- School Fees, Board, and Room
- Equipment, materials, and books
- Transportation\Fees
#4
All qualified educational expenses are covered by the student loan interest deduction, but not all of them are. A few of these include
- Tuition and fee deductions and education credits do not apply to costs associated with sports, activities, hobbies, or non-credit courses.
- Travel with the intent to enhance knowledge or expertise. A Spanish instructor, for instance, cannot claim a tax deduction for her travel costs if she visits Spain to develop her language skills.
- Any out-of-pocket expenses for vacation or annual leaves taken for school.
In some cases, if the course or activity is a requirement for your degree program, you may be able to deduct the costs associated with participating in sports, games, or other non-credit activities.
#5
You can directly deduct your self-employment income if you are a self-employed person from your taxable income and the costs of any acceptable education connected to your line of business. Also included in this is the interest on your college loans. Here are a few instances of freelancers who are legally permitted to deduct the interest on their education loans:
Performers: If you are a performer (an actor, dancer, singer, choreographer, or acrobat), you are eligible to deduct the costs of a qualifying course of employment-related education directly from your income when calculating your AGI.
Freelance Developer: If you are a freelance developer and took out a student loan to pursue a degree or other program to progress your career, you can write off the interest paid on the loan because the education will help you acquire the skills required for your current job.
Real estate agent: You can deduct your student loans and tuition if you are a real estate agent because you are required to complete continuing education courses in real estate in order to keep your license current.
#6
When it comes to saving money, the student loan interest deduction is really beneficial, especially if you work for yourself. An above-the-line deduction, not a tax credit, is allowed for student loan interest. Your taxable income can be decreased with this strategy.
For instance, if Jon filed his taxes alone and his MAGI was $60,000, he would be subject to a 22% tax rate. If he paid more than $1,000 in interest on his student loans, which is roughly the typical deduction, the student loan interest deduction will enable him to save $220. His potential savings are only $550.
#7
In addition to the loans described above, there are a few government-sponsored programs and tax credits that can help you pay down your student loan debt:
American Opportunity Credit: Under the Affordable Care Act, you are permitted to claim up to $2,500 per year for the first four years of school as you pursue a degree or comparable certification.
Lifetime Learning Credit: The lifetime learning credit allows you to deduct up to $2,000 per student per year for tuition and fees at any college or career school, as well as for the cost of any books, supplies, or equipment that were necessary for the course and had to be purchased from the institution.
Coverdell Education Savings Account: The U.S. government established the Coverdell Education Savings Account as a trust to help families pay for beneficiaries’ educational costs who are under the age of 18. A student may deposit up to $2,000 a year into the account to use for educational costs.
Qualified Tuition Programs: Under the qualified tuition program, the interest paid on student loans taken out for you, your spouse, or a dependent is deductible from your taxable income. All loans taken out to cover higher education costs qualify for this benefit. $2,500 a year is the maximum deduction.
#8
Since the IRS does not permit double dipping, if both your parents and you take out student loans to pay for your education, they will be unable to deduct the interest on those loans on their tax returns because they did not list you as a dependent when they did so. As long as you adhere to the rules outlined by the IRS, you are permitted to deduct the loan you obtained for yourself.
The process of figuring out your tax deduction for student loan interest might be complicated, especially if you’re in the gig economy. There are simply too many factors to take into account, like retirement contribution limits. If you believe you qualify but are unsure of how to proceed, try using FlyFin’s Student Loan Interest Tax Calculator to determine the precise amount you may deduct to optimize your savings or the 1099 tax calculator.
Also Read: Secured vs. Unsecured: Which Installment Loans Are Right for You?
