Last Updated on July 29, 2023
Are Payments On Student Loans Tax Deductible?
If you’re in school and paying off your student loans, or if you’re a parent of a college-bound child, then the answer to this question is probably yes. Even if you haven’t yet paid off your student loans, the interest that accrues while they are still outstanding can be deducted as an expense against your taxable income.
Here’s how it works: If you have no other tax deductions to use up (e.g., mortgage interest), then any payments of interest will be tax deductible each year. In fact, the IRS has a special table that makes it easy for people with student loan debt to determine how much of their payment qualifies as a tax deduction. The table provides an amount based on the size of a person’s adjusted gross income (AGI).
For example, let’s say John Doe has an AGI of $100,000 and he made $6,000 in student loan payments last year. The IRS table shows him that he can deduct $1,000 from his taxable income as an interest payment on his student loan debt. This means John Doe can subtract $1,000 from his AGI when calculating his total income and taxes owed for the year!
Are Student Loans Tax Deductible?
If you’re making student loan payments, you may be able to deduct the interest you pay throughout the year on your tax return. That and mortgage interest are generally the only forms of interest that provide a deduction at tax time.
The deduction on student loan interest is made early on in the tax calculation process as an adjustment to your gross income, so you don’t have to worry about itemizing your deductions as you do with other common tax breaks.
There are, however, some limitations with deducting student loan interest. Here’s what you need to know before you file your next tax return.
How Do Tax Deductions Work on Student Loans?
The U.S. tax code allows you to deduct up to $2,500 in student loan interest on your tax return every year, depending on how much you paid and your income level. You should receive what’s called a 1098-E form from your student loan servicer or lender, which shows how much interest you paid during the year.
To qualify for the deduction, you need to meet the following eligibility requirements:
- You paid interest on a qualified student loan during the tax year.
- You’re legally obligated to pay interest on the loan.
- You aren’t married and filing separately from your spouse.
- Neither you nor your spouse (if you’re filing jointly) can be claimed as a dependent on someone else’s tax return.
- Your modified adjusted gross income (MAGI) is less than a certain amount, which is determined each year (more below).
The loan itself also needs to meet certain criteria for you to qualify for the deduction:
- It was taken out to pay qualified higher education expenses for you, your spouse or a person who was your dependent when you borrowed the money.
- The expenses were incurred for education provided during an academic period for an eligible student.
- The expenses were paid or incurred within a reasonable period of time before or after you took out the loan.
For the 2020 tax year, the income limit is a MAGI of $85,000 if you’re filing on your own and $170,000 if you’re married filing jointly. The value of the deduction is gradually reduced as your income gets closer to that limit: If your MAGI is $70,000 or more for single and head-of-household filers and $140,000 or more if you’re married filing jointly, you’ll begin to see a decreased deduction.
Remember, this is your MAGI, which is lower than your gross income. If you’re using tax preparation software or you’ve hired a professional, they can figure out what your MAGI is for you. If you’re filing taxes on your own, you can use a worksheet provided by the IRS.
Additional Tax Breaks for Education
If you’re still in school or you’re saving for or paying qualified education expenses for a spouse or dependent, you may also be eligible for other tax breaks. Here are the three most common ways to save on taxes with education.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) allows you to claim a credit of up to $2,500 for qualified education expenses—that’s 100% of the first $2,000 and 25% of the next $2,000 spent.
Unlike a deduction, which reduces your taxable income, a credit is a dollar-for-dollar reduction of your actual tax bill. You can only get the AOTC for the first four tax years for each eligible student, which typically covers just an undergraduate degree.
If you don’t owe taxes, 40% of the credit is refundable, meaning you can get it in the form of a tax refund.
But like the student loan interest deduction, there are some limitations, so do your due diligence and read about the credit to make sure you qualify.
Lifetime Learning Credit
The AOTC only lasts for the first four years of your higher education. But what if you continue on to graduate school or other programs? This is where the Lifetime Learning Credit (LLC) comes into play.
The LLC offers a 20% credit on the first $10,000 you spend on qualified education expenses, up to $2,000. So it’s not as generous as the AOTC. Also, no portion of the credit is refundable, which makes it less appealing if you have the choice between the two.
That said, there’s no limit to the number of years you can claim it, so it’s perfect if you’ve already exhausted your AOTC claims. Read about the LLC to find out if you’re eligible and how much you can claim.
529 Plan
If you’re saving for future education expenses, either for yourself or one of your children, a 529 plan is one of the best ways to do it. Not only does it allow your funds to grow tax-free, but it may also give you an upfront tax break on your state tax return.
According to Saving for College, several states offer some form of a tax break or deduction on your contributions to a 529 plan. It’s also important to note that distributions from the plan are tax-free as long as you use them for qualified education expenses.
How to Pay Off Your Student Loans Faster
Getting a tax break on your student loan interest is nice, but paying less interest will give you an even better return on your efforts. Depending on your situation, there are several ways to pay off your student loans faster. Here are just a few:
- Make interest-only payments while you’re still in school.
- Make additional payments every month.
- Pay half of your monthly payment every two weeks.
- Consider refinancing your student loans at a lower rate and possibly a shorter repayment term.
- Set up automatic payments (some lenders offer an interest rate discount if you do).
- Look for ways to earn extra money that you can use to pay down your balance faster.
There’s no single best approach to paying down student loan debt, so research all of your options to find the best strategy for you.
Pay Student Loans on Time to Build Credit
If you’re a recent college graduate, you may not have had time to start building a credit history. Making your student loan payments on time every month can help you build a positive payment history, which is the most important factor in your FICO® Score☉ .
Even if you’ve been out of school for a while or you’re a parent of a student, on-time payments will make it easier for you to build and maintain a good credit history.
Check your credit score throughout the repayment process to keep track of your progress, and look for opportunities to address potential concerns as they arise.
Do you have private student loans? Don’t forget to take this tax deduction
While federal student loan borrowers haven’t had to face loan repayment or worry about racking up interest charges since the beginning of the pandemic, private student loan borrowers haven’t been as lucky since the current federal payment moratorium doesn’t apply to student loans that are privately funded.
According to EducationData, it’s estimated that 13% of students use loans from a private source such as a bank or credit union. As student loans continue to be a burden for millions of Americans, there’s a bit of a silver lining in the form of a special tax benefit those in this situation can take advantage of.
Using the student loan interest tax deduction
If you accrued any student loan interest in 2021, your lender should be sending you a 1098-E form, which discloses how much you have paid in total for that year. You’ll find this on line 21 of the Schedule 1 (form 1040), and you’re able to deduct up to $2,500.
Note, however, that this deduction is limited and based entirely on your 2021 income. If your modified adjusted gross income was under $70,000 (for single filers) or $140,000 (if filing jointly,) you’re allowed to deduct the entire $2,500. If your modified adjusted gross income was between $70,000 and $85,000 (for single filers) or $170,000 (if filing jointly), you’re allowed to deduct less than than the $2,500 maximum.
Keep in mind that any principal you pay down on your student loan is not tax-deductible. Whether you’re working with a tax professional or using a tax software service like H&R Block or TurboTax, indicate the amount of student loan interest you paid in 2021 to help reduce your taxable income.
H&R Block
- CostCosts may vary depending on the plan selected – see breakdown by plan in the description below
- Free versionYes (for simple returns only)
- Mobile appYes
- Live supportYes, costs extra
- Better Business Bureau ratingA+
Terms apply.
Pros
- Simple step-by-step guidance that’s easy to follow
- Unlimited on-demand chat or video support with Online Assist plans
- Ability to speak to a tax expert who has an average of 10 years experience (costs extra)
- Over 11,000 physical locations so you can meet with a tax expert in-person
- Maximum refund guarantee, or H&R Block will refund the plan fees you paid
- Audit support guarantee, which provides free assistance if you get an IRS or other tax notice
- 100% accuracy, or H&R Block will reimburse you for any penalties or interest up to $10,000
Cons
- Plans that include speaking with a live tax expert start at $69.99 for federal, plus additional state fee
- One of the more costly software programs
Cost breakdown by plan:
20% off DIY online tax filing – offer ends April 18, 2022
- Free (for simple returns): $0 federal, $0 per state
- Deluxe (helps you maximize credits and deductions): $43.99 federal, $44.99 per state
- Premium (includes returns with investments and expenses): $59.99 federal, $44.99 per state
- Self-employed (for personal and business income and expenses): $91.99 federal, $44.99 per state
- Online Assist Basic (includes help from tax experts): $69.99 federal, $0 per state
- Online Assist Deluxe (includes help from tax experts): $109.99 federal, $44.99 per state
- Online Assist Premium (includes help from tax experts): $159.99 federal, $44.99 per state
- Online Assist Self-employed (includes help from tax experts): $194.99 federal, $44.99 per state
TurboTax
- CostCosts may vary depending on the plan selected – see breakdown by plan in the description below
- Free versionYes (for simple returns** only)
- Mobile appYes
- Live supportYes, costs extra
- Better Business Bureau ratingA+
Terms apply, see below for our methodology.
Pros
- Step-by-step guidance with a Q&A format that is easy to follow
- TurboTax Live provides on-demand advice and a final review from a tax expert
- Live Full Service has a tax expert prepare, sign, and file your return
- Accuracy and maximum refund guaranteed*
- Audit support, which provides free assistance if you get an IRS or other tax notice
Cons
- More costly than other software programs
- Live expert assistance plans have additional costs
Cost breakdown by plan:
- Free (for simple returns** only): $0 federal, $0 per state
- Deluxe (helps you maximize credits and deductions): $39* federal, $39* per state
- Premier (includes returns with investments and expenses): $69* federal, $39* per state
- Self-employed (for personal and business income and expenses): $89* federal, $39* per state
- Live Basic (includes help from tax experts): for a limited time, $0* federal, state included – simple tax returns only; must file by 3/31
- Live Deluxe (includes help from tax experts): $119* federal, $49* per state
- Live Premier (includes help from tax experts): $169* federal, $49* per state
- Live self-employed (includes help from tax experts): $199* federal, $49* per state
- Full Service Live Basic (includes help from tax experts): for a limited time, $0* federal, state included – simple tax returns only; must file by 2/15
- Full Service Live Deluxe (includes help from tax experts): $249* federal, $49* per state
- Full Service Live Premier (includes help from tax experts): $359* federal, $49* per state
- Full Service Live self-employed (includes help from tax experts): $389* federal, $49* per state
How to reduce your student loan interest
Paying down your student loans isn’t a fun journey, and seeing the interest rack up on all that debt can feel like adding salt to the wound. The good news is there is one way you can significantly reduce the amount of interest that’s being paid out.
Refinance your student loans
Similar to the way you would refinance a mortgage, the act of refinancing your student loans simply means you’re moving your debt from one place to another in order to earn a lower interest rate or secure better repayment terms. The best part is the process is simple and in many cases, fee-free.
I’ve actually refinanced my student loans six times and it’s saved me tens of thousands of dollars in interest, allowing me to significantly pay down my loans from nearly $80,000 to less than $10,000 in under seven years. Now that I’m working with a mere 2.25% interest rate by using a personal line of credit, I’m slowly paying back my loans and prioritizing investing within my 401k and Roth IRA.
To get started refinancing, find your current student loan balance, interest rate and repayment schedule. From there, see if a student loan refinancer like SoFi or Laurel Road can offer better repayment terms or come up with a lower interest rate.
In my own student loan journey, the combination of making heavy repayments and refinancing my interest rates down as far as possible has been the key to paying them off in full.
Just remember that if you have federal student loans and refinance them with a private lender, you’ll lose federal protections and won’t be eligible for the current federal student loan payment mortarium.
