While most interest paid toward personal debt is not tax-deductible, the government has made an exception for student loan interest. The deduction can decrease your taxable income by thousands, depending on your situation.
One of the most common misconceptions about the student loan interest deduction is that a parent can claim it for helping make payments on their child’s loan. That is not the case.
A parent can take the deduction only if they are personally liable for the loan.
The student loan interest deduction allows an individual to deduct any interest actually paid, not just accumulated, on a student loan during the tax year, as long as certain conditions are met.
The maximum deduction is $2,500 and is subject to income limitations.
This deduction is actually an adjustment to your taxable income, which means you do not need to itemize your other deductions to get it. And you can take the standard deduction and still deduct your student loan interest.
Eligible Interest Payments
Determining the actual deduction amount may require the use of a somewhat complex formula, but the basic premise is simple. In essence, you can deduct only the portion of each loan payment that represents interest. You may also deduct any fees that you paid upfront to receive the loan, such as origination fees, over the life of the loan. And you can deduct the portion of your principal loan payments that represents capitalized interest, which your lender calculates for periods when you're not making payments, such as during a deferment immediately after graduation.
If you paid more than $600 in interest on your student loan, you should receive a Form 1098-E, Student Loan Interest Statement, from your lender that will include the total amount of your payments that were considered to have been allocated toward interest. For an example of how to figure out additional amounts that can be considered interest, including the correct percentage of origination fees, see the Allocating Payments Between Interest and Principal section of the Student Loan Interest Deduction chapter in the Internal Revenue Service's Publication 970, Tax Benefits for Education.
Certain types of student loans do not qualify for the deduction. These would include a loan taken from a qualified retirement plan like a 401(k) or 403(b) and a loan made between related parties. For example, if your grandparent gave you a personal loan for your education expenses, the interest on the loan would not be tax-deductible.
All of the following must be true of the loan and your tax filing status for the interest to be considered deductible:
- Your filing status is not married filing separately.
- No one else can claim you—or your spouse, if you're married—as a dependent on their tax return.
- You are legally obligated to pay the interest on the student loan.
- You actually paid the interest. Accumulation of interest on your balance by itself is not deductible.
Further, the money received from the loan must have been used only for qualified higher education expenses, such as tuition, fees, room and board, books, supplies, and equipment.
|For 2019, if your status is ...||... and your MAGI is ...||... then your student loan interest deduction is ...|
|single, head of household, or qualifying widow(er)||$70,000 or less||not affected by the phaseout.|
|single, head of household, or qualifying widow(er)||more than $70,000 but less than $85,000||reduced by the phaseout.|
|single, head of household, or qualifying widow(er)||$85,000 or more||eliminated by the phaseout.|
|married filing jointly||$140,000 or less||not affected by the phaseout.|
|married filing jointly||more than $140,000 but less than $170,000||reduced by the phaseout.|
|married filing jointly||$170,000 or more||eliminated by the phaseout.|
If you fall in the middle range of incomes and your deduction is reduced by the phaseout, you will need to calculate the amount you can deduct. You will multiply your pre-phaseout interest deduction by a fraction:
- whose numerator (the top figure in the fraction) is a) your MAGI minus $70,000 if you're single, head of household, or a qualifying widow(er) or b) your MAGI minus $140,000 if you're married filing jointly.
- whose denominator (the bottom figure in the fraction) is a) $15,000 if you're single, head of household, or a qualifying widow(er) or b) $30,000 if you're married filing jointly.
For example, if you are single, you paid $900 in interest on your student loan, and your MAGI was $75,000, your reduced deduction amount is $300:
$900 x ($75,000 – $70,000) / $15,000 = $900 x $5,000 / $15,000 =
$900 x 0.33333333 = $300
Claiming the Deduction
To claim the deduction, enter the allowable amount on Schedule 1 (Form 1040 or 1040-SR), line 20; Form 1040-NR, line 33; or Form 1040-NR-EZ, line 9.