Student Loan Interest Tax Deduction

Student Loan Interest Tax Deduction

8 min read


The interest tax deduction was passed in 1986 under President Ronald Reagan and became effective January 1, 1987, but has been amended many times since then.

Since its inception, the interest tax deduction has allowed students pursuing higher education to deduct their student loan interest paid directly to the lenders. By giving borrowers a break on their interest payments, this encourages them to take out loans. However, the government took away some of the original intent of the law after the housing market crashed. As a result, millions of Americans were unable to claim the deductions due to a change in how banks account for income.

In 2018, the IRS issued a ruling that said student loan interest should still be deductible  even if the bank accounts did not allow for it. If interest is accrued on deposits held at financial institutions, this includes savings accounts, checking accounts, money markets, certificates of deposit, and any kind of certificate of deposit. The interest on these funds would still be tax deductible.

To qualify for the student loan interest deduction, you need to have a student loanand a and a direct lender. Direct lenders include private banks, credit unions, nonprofit institutions, and others. Private lenders are not regulated by the federal government.

Students pay back their loans over time, usually between10 and 30 10 and 30 years. Students may choose to pay off their loans early, butbut doing so will mean losing the interest tax deduction.

If the loan amount is $10k or less, the student does not need to itemize; they only need to file taxes using the standard deduction.

For larger amounts, the student must use itemized deductions. For example, let’s say that the student borrows $50,00050,000 and pays 6% interest each year. To calculate how much interest he owes each year, just multiply the principal ($50k) by 0.0625 (the yearly rate). So, his total monthly interest payment would be $250.

Next, figure out what percentage of his income goes to paying off his loan. Most people don’t want to tell the IRS how much they earn, so we’ll assume that the person earns $100k per year. Divide the annual interest payment ($250) by the annual income ($100k), and divide by 12 months (the length of the year). In our case, the student makes $832.33 monthly. Divide that by 30 days,and you and you get $27.56. That means that 26% of his income went toward paying off his debt.

Now, figure out how much of his income went toward taxes. The student may earn $50,000 per year but owe $20.00 in state and federal taxes.The student may earn $50,000 per year but owe $20.00 in state and federal taxes.He’ll only be able to deduct $17,000 of his income. Since he earned $50k before taxes, dividing that number by 12 gives us $4216.67. Dividing that by 30 days results in a monthly deduction of $1371.86. That means that 71% of his income went towards taxes.

Deduct the remaining 29%, and remember that you cannot deduct anything that exceeds 2%.

It is possible to lose money paying down your debt  and therefore not be eligible for the interest tax deduction. You can lose money by paying high interest rates, having bad repayment terms, or having fewer than 12 months left on your term. Also, you cannot deduct future interest on a loan that is in forbearance.

If you lost deductions while taking out a loan to finance your education, you can apply for relief via Form 843.

Student LoanLoan Interest Tax Deduction

Student loanloan interest tax deduction

In 2017, taxpayers who had student loan debt could deduct any qualifying interest payments they paid on their federally-issued student loans beginning in 2018. If a taxpayer ownedhis or her his or her student loans (rather than having them serviced), he/she was eligible for the full interest tax deduction if the student loan debt exceeded $10,000 at the start of the year. However, the IRS issued a temporary regulation that would allow parents to make their children’s student loans their own rather than havehave them held by a third party. Taxpayers could still deduct the qualified interest paid on their child’s student loans. However. However, the total amount of interest the parent could claim to deduct would be reduced based on how much equity they had in the loan. A taxpayer with no equity owned 100% of his/her student loan would only be able to deduct 50% of the interest paid in a given year. For those with greater amounts of equity, the percentage went down accordingly. In addition to the interest tax deduction, students could also deduct certain fees associated with their education.

Education credits

The American Opportunity Credit, Hope Credit, and Lifetime Learning Credit allowallow eligible individuals to receive federal income tax refunds at lower rates. To qualify forthis type this type of credit, students had to have been enrolled in school for at least half time and had to have completed 120 hours of coursework during the prior academic year. Any remaining credits were added to a student’s lifetime learning account. Those eligible for the American Opportunity Credit included people who attended college full time for one academic year, while those who took advantage of the Hope Credit and Lifetime Learning Credit could attend school part-time.

Refundable tax credits

Refundable credits could be claimed by families, including dependents, who earnearn less than $150,000 per year. Eligible families included those whose annual adjusted gross income was less than $65,000 and single filers earning less than $87,500.This kind This kind of credit comescomes in the form of the Earned Income Tax Credit. In 2016, the maximum refundable credit was set at 35%, with higher percentages being awarded to families making between $15,240 and 15,240 and $74,470 annually. Families making over $75,490 received a smaller refundable credit than those in the middle range.

Loan forgiveness

Borrowers could apply for student loan forgiveness if they entered public service, became totally disabled, or died after incurring the debt. Applicants had to complete three years of public service, pay back the entire principal balance, or die before the end of 10 years. After that period of time elapsed, any outstanding debt would become completely forgiven.

Tuition tax creditTuition tax credit

This kind of tax benefit allowed taxpayers to defer paying taxes on the first $10,000 they spent on tuition each year up until that point. This benefit could be usedused for undergraduate or graduate level education. There were two different kinds of tuition tax benefits: the Lifetime Learning Credit and the American Opportunity Credit. While both provided similar results, only the former was refundable.

Student LoanLoan Interest Tax Deduction

The student loan interest deduction was enacted by Congress in 1981. You can deduct 20% of qualified educational expenses paid or incurred during the year. Qualified educational expenses includeinclude tuition, fees, books, supplies, equipment, training costs, student activities, and transportation to and from school. You don’t have to itemize deductions on Form 1040 if your taxable income is less than $100,000 ($200,000 for married joint filers). There’s no limit on how much you can deduct each year, but the amount cannot exceed 2 percent of your adjusted gross income (AGI) plus $10,000 ($20,000 for married joint filing status).

You must itemize deductions to qualify for a deduction; the standard deduction doesn’t apply. However, certain types of student loans, including federally guaranteed student loans, are not deductible. Also, the use of Schedule A (Form 1040A), rather than Schedule C (Form 1040), does not permit you to take the deduction.

If you’re eligible for both the standard deduction and the student loan reduction, the maximum tax savings is equal to 40%. If you’re eligible only for the standard deduction, the maximum tax savings equals 22%. The tax benefit of using both methods may increase depending onon your AGI. To determine whether you’re eligible for this deduction, simply subtract your total qualifying education expenses from your total regular federal income taxtax due.

Source: IRS Publication 970:: Individual Income Tax Guide

Student LoanLoan Interest Tax Deduction

Student loanloan interest tax deduction

A student loan interest tax deduction is a federal income tax benefit for interest paid on student loans. In order to qualify for this benefit, you have to meet several requirements,requirements, including having at least $10,000 in outstanding loans. You also need to file either Form 1098-T (or other similar forms) reporting the interest payments. Most students do not pay any interest on their student loans and,and, thus,thus, cannot take advantage of this tax deduction.

How to apply

If you want to claim the interest tax deduction, you should first find out if you are eligible for it by reviewing IRS Publication 970. Next, fill out Form 8863 and attach it to your tax return. Finally, send the completed form along with supporting documentation to the IRS.

Who is eligible?

Students who receivereceive a qualified education for less than $60,000 are eligible for this tax deduction. Students who were awarded degrees over $60,000 are not eligible for the deduction,deduction, even though they may still be able to deduct some portion of their educational costs.

Student LoanLoan Interest Tax Deduction

Student loanloan interest tax deduction

Interest paid on student loans is deductible  if you itemize deductions on your taxes. If you do not itemize deductions on your tax return, then any interest paid on student loan debt would be considered a non-deductible personal expense. There is no cap on how much interest can be deducted each year. Howeveryear. However, the interest cannot exceed what was originally borrowed.

taxtax bracket

Your income is taxed at different rates depending upon where you fall within the tax brackets. In general, the lower your income, thehigher the higher the rate you will pay. When calculating your effective federal tax rate, your taxable income includes both standard deductions and additional tax allowances.


Exemptions allow taxpayers tohave their have their money excluded from taxation. An exemption may be claimed based on age (such as being 65), relationship status, dependents, or low income. Exemptions must be claimed on Form 1040 and Form 1040A.


Dependent children are those who are under the age of 19 and are financially dependent on their parents. A child’s dependency status does not change due to marriage, divorce, or death. Dependency exemptions are allowed based on your child’s age and your marital status.

Standard deduction

The standard deduction is simply the amount of money that you can deduct from your taxable income before filing your taxes. You can claim a standard deduction on your individual and joint returns. If you do not claim the standard deduction, you will be required to calculate and subtract your adjusted gross income from the standard deduction amounts.

There are many ways to pay off your student loans faster.

You can start budgetingto pay to pay down your debt. Pay yourself first.You have You have a set monthly payment that goes towards paying off your balance. By planning ahead, you show lenders that you are a responsible personand that and that you are willing to budget your money properly.

If you are already working, you should consider contributing to a retirement account. If you contribute $100 per month, your balance will be reduced by about $1,000 over 20 years. That means you are saving $100 per month for the next 18 years. Once you retire, you can stop making payments.

If you aren’t working yet, think about the job you want after school. Do you need a degree? You might get a scholarship or work study program that pays for your education. These options usually require you to begin repaying your loans immediately after graduation. You don’t want to wait until you have a steady job lined up.

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