The Federal Student Loan Interest Deduction

Interest Paid on Student Loans Is Still Tax Deductible

graduate in cap and gown
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The student loan interest tax deduction is one of those advantageous "above the line" deductions that you can claim without itemizing. It's tucked into the adjusted gross income (AGI) section of Form 1040. This means that you can take it in addition to itemizing other deductions, or you can take it if you choose to use the standard deduction rather than itemize.

The deduction reduces your adjusted gross income, and this can directly affect your eligibility for numerous other deductions and tax credits.

Rumors of the Deduction's Demise 

It was initially believed that this lucrative tax break for students would disappear with the passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017. An early version of the tax bill did indeed include a provision to do away with the student loan interest deduction. Fortunately, many congressmen listened when students, colleges, and universities protested in significant numbers.

The final version of the TCJA pulled the deduction back into the fold. It's still alive, well, and available in 2018. 

Reporting Student Loan Interest

There's no need to dig through all your student loan statements for the year trying to track down how much interest you paid. Your lender should send you a Form 1098-E sometime after the first of the year. The amount of interest you paid is reported in box 1.

Are You and Your Loan Eligible? 

You can deduct interest on student loans paid by you, or by your spouse if you file a joint return.

You can't claim the student loan interest deduction if you file a separate married return. You must use the single, head of household, qualifying widow(er), or married filing jointly filing status to claim it, and you can't be claimed as a dependent on anyone else's tax return.

You must also be legally obligated to repay the loan—this means that you and/or your spouse are the signatories on the loan if you file a joint return.

If your child takes out the loan in his own name and is the obligor, you can't claim the deduction if you make the payments for him. Only he can do so...provided you're not claiming him as a dependent. 

The loan must be a qualified student loan for the benefit of you, your spouse, or your dependent. Loans from a qualified employer plan don't count, nor do private loans from family or friends. 

Limits and Income Limitations 

The most student loan interest you can claim as a tax deduction is limited to $2,500 as of the 2018 tax year. This limit hasn't changed from the 2017 tax year.

The deduction is also limited by your income—it's reduced for taxpayers with modified adjusted gross incomes (MAGI) in a certain phase-out range and it's eventually eliminated entirely if your MAGI is too high. 

What Is Modified Adjusted Gross Income? 

Your MAGI is critical to the computation of whether you're subject to the deduction phase-out. It's your all-important adjusted gross income before you take other deductions into account. These include the student loan interest deduction you're hoping to qualify for—you can't deduct this first before calculating your MAGI. You must also add back in any deductions you took for tuition and fees on line 34 of the 2017 Form 1040, and for domestic production activities which would appear on line 35 of that tax form.

You must also add back the following exclusions and deductions if you took any of them, but these are somewhat uncommon:

  • The foreign earned income exclusion
  • The foreign housing exclusion
  • The foreign housing deduction
  • The income exclusions for residents of American Samoa or Puerto Rico

Most taxpayers will find that their MAGIs are very close to—if not identical to—their AGIs. In the case of the student loan interest deduction, you might find that you only have to add back the deduction itself and the tuition and fees deduction. 

Student Loan Interest Deduction Phase-Outs 

The phase-out ranges for the 2018 tax year are: 

Filing StatusPhase-out Begins Phase-out Ends
Married Filing Jointly130,000160,000
Qualifying Widow(er)65,00080,000
Head of Household65,00080,000
Single65,00080,000
   

If your MAGI is under the threshold where the phase-out begins, you can deduct up to $2,500 in student loan interest or the actual amount of interest you paid, whichever is less.

Your limit is prorated if your MAGI falls within the phase-out range. The IRS explains how to calculate the reduced student loan interest deduction in Chapter 4 of Publication 970:

"If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. To figure the phase-out, multiply your interest deduction (before the phase-out, but not more than $2,500) by a fraction. The numerator is your MAGI minus $65,000 ($130,000 in the case of a joint return). The denominator is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phase-out) to give you the amount you can deduct." 

Unfortunately, your student loan interest isn't deductible at all if your income is more than the ceiling where the phase-out ends. 

You can use the worksheet found in Publication 970 to calculate the deductible portion of your student loan interest.  

Changes for the 2018 Tax Year 

Although the deduction itself remains intact after the passage of the TCJA, the IRS has announced that it will be issuing a new 1040 tax form for the 2018 tax year to help accommodate other changes made by the TCJA. This might well affect how and where you can claim this deduction if you're eligible, but rest assured that you still can.

You just might need the help of a tax professional, or purchase reputable tax preparation software to take the headache out of it.