What is the student loan interest deduction?
If you are currently repaying student loans, you may be able to deduct interest paid on your loans. In this article, we’ll go through the ins and outs of the student loan interest deduction.
What is student loan interest?
Student loan interest is interest you paid during the year on a qualified student loan. This includes both required and voluntarily prepaid interest payments. How much you paid in interest can typically be found on a tuition statement from a higher education institution or on your monthly statement from your student loan servicer.
How much interest can be deducted?
If you paid interest to a qualified loan program during 2023, you may be eligible to deduct up to $2,500 in interest payments from your taxable income per return per year.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were: for you, your spouse, or a person who was your dependent when you took out the loan; for education provided during an academic period for an eligible student; and paid or incurred within a reasonable period of time before or after you took out the loan.
Qualified education expenses include tuition and fees, room and board, books and/or supplies required for classes, and other necessary expenses like transportation.
According to the IRS, you can claim the deduction if all the following apply:
- You paid interest on a qualified student loan for the previous tax year
- You’re required to pay interest on a qualified student loan
- Your filing status is anything other than married filing separately
- Your Modified Adjusted Gross Income is less than the annual set limit (in 2023, $90,000 for single filers and $185,000 for joint filers)
- You are not listed as a dependent on someone else’s return. The same goes for your spouse if you are filing jointly.
It’s possible to deduct interest from both federal and private student loans, but not on loans from a relative or from a tax-advantaged retirement plan such as a 401(k).
How does the student loan interest deduction work?
This deduction is known as an “above-the-line” deduction, according to the IRS. This type of deduction is defined as a deduction applied before you calculate your adjusted gross income. This process lowers your adjusted gross income (AGI), and therefore lowers the amount of taxes you pay. The IRS says you are able to claim the student loan interest deduction whether you claim the standard deduction or if you itemize.
According to the IRS, for tax year 2023, if you are single, head of household, married filing separately, or a qualifying widow(er), your student loan interest phase-out starts at $75,000 ($80,000 in 2024) modified AGI and is completely phased out at $90,000 ($95,000 in 2024). If you are married and filing jointly, you can make $155,000 ($165,000 in 2024) before the phase-out begins. The deduction phases out completely for married couples filing jointly at $185,000 ($195,000 in 2024).
If you paid more than $600 in student loan interest in 2023, your loan provider is required to send you a Form 1098-E detailing your interest expenses. If you decide to take the student loan interest deduction, you can use your 1098-E to determine how much to deduct. According to the IRS, you fill in the amount of your student loan interest deduction on Schedule 1, line 20 of the IRS Form 1040. If you did not receive a 1098-E because your interest expenses were lower than $600, you are still able to take the deduction if you choose to.
How the CARES Act can help you pay your student loans
Thanks to the CARES Act set in place at the start of the Covid-19 pandemic, loan repayment on qualifying student loans was paused and interest rates were set to 0% between March 13, 2020, and Sept 1st, 2023. The IRS says taxpayers who resumed repayment for principal and interest on student loans this past fall are able to deduct interest expenses, assuming they meet the other requirements.
The IRS notes that taxpayers who paid interest on student loans while the CARES Act was still in place are also able to deduct that interest, even though the payments weren’t required.
The CARES Act also expanded the IRS’s tax code to allow for employers to make tax-free contributions toward an employee’s student loan debt, up to $5,250 annually. Previously, the law only allowed for contributions toward “books, equipment, supplies, fees, tuition and other education expenses.”
This article is for educational purposes only and should not be taken as tax advice. Speak to a licensed tax professional for tax advice.
Disclosures:
All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. M1 does not provide any financial advice.
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