How to get your student loan interest deduction

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The Student Loan Interest Deduction allows you to deduct up to $ 2,500 from your taxable income on student loan interest. (iStock)

If you have a student loan, payment for college doesn’t end when you leave school. And student loan repayments can cost thousands of dollars in interest each year, depending on the loan balance, your interest rate, and the repayment period.

Student Loan Interest Deduction is a tax break that reduces the cost of college education by reducing your federal taxable income by up to $ 2,500. Since this is an input tax deduction, you can claim it even if you do not include your deductions on your tax return.

This deduction may be possible if you pay interest on a qualified student loan and meet certain requirements. Learn how student loan interest deduction works, who is eligible, and how to apply for it.

Refinancing can also help reduce the cost of interest on student loans, so it can make sense to Compare rates from multiple lenders use a marketplace like Credible.

How does the interest deduction for student loans work?

ONE Tax deduction allows you to deduct a certain amount from your taxable income before calculating your tax liability. Let’s say your taxable income is $ 50,000 and you are eligible for the maximum interest deduction of $ 2,500 on student loans. It reduces your taxable income to $ 47,500, which can lower your federal tax liability.

You can claim the interest deduction on the student loan if:

  • You have required or prepaid interest payments on a qualified Student Loans.
  • The loan was for yourself, a spouse, or a dependent.
  • The student attended a suitable university. A qualifying loan can be a government or private student loan. Funds received from a relative or a qualified employer’s plan will not qualify.
  • Accredited public and private universities, colleges, trade schools, and other post-secondary education institutions are considered eligible schools if they qualify to participate in a student assistance program administered by the Department of Education.

Who can claim the interest deduction for the student loan?

Only borrowers who meet all eligibility requirements can claim the interest deduction for the student loan. If you are married, your application status must be submitted together – you will not be able to claim this deduction if you and your spouse file separately. And your Marginal Adjusted Gross Income (MAGI) – income before student loan interest – must be less than a certain amount.

In addition, you must meet these requirements:

  • You have made interest payments on a qualified student loan.
  • You are legally obliged to pay interest on the loan.
  • Filed together, neither you nor your spouse can be claimed as dependent on someone else’s tax return.
  • You must be enrolled in a program leading to a degree, certificate, or other recognized degree at least half of the time at an appropriate school.

For the 2020 tax year, the modified adjusted gross income limits for qualification were:

  • $ 85,000 if your enrollment status was single, head of household, or qualifying widow
  • $ 170,000 if your enrollment status was married, submit together

Keep in mind that these limits are subject to change for 2021 taxes due in April 2022. If you need help, the IRS has one Interactive tax assistance tool on his website to determine if you are eligible for the Student Loan Interest Deduction.

If you are considering refinancing to lower the cost of interest on student loans, Credible makes it easy for you to Compare rates from multiple lenders.

How much can I deduct for student loan interest?

The maximum interest deduction for student loans is $ 2,500. If you are eligible, the amount you can deduct will depend on the following factors:

  • Your MAGI
  • The amount of interest you paid on your student loan
  • How much of the interest can you deduct?

Your MAGI affects how much you can deduct – once it reaches a certain amount, the $ 2,500 deduction begins to gradually taper off. For example, if your MAGI is below the phasing out threshold and the amount of qualifying interest you paid was $ 600, then you can deduct $ 600.

However, if your MAGI falls into the phasing out area, you will be able to deduct less interest.

Here are the discontinued areas for the 2020 tax year:

  • $ 70,000 and $ 85,000 if your enrollment status is single, head of household, or qualifying widow
  • $140,000 and $ 170,000 if your enrollment status is married, submit together

Here, too, these thresholds could be different for the tax year 2021.

Student loan deferral and tax deduction

If you have one Federal Forbearance Student Loans, Interest has been waived and payments have been suspended until January 31, 2022. This means that if you continued to make payments that year, they were added directly to your main balance. Since you did not pay interest on this loan, you cannot claim the student loan interest deduction for this loan.

However, once interest returns on February 1, 2022 and you resume payments on the loan, you may be able to claim the student loan deduction when you file your taxes for 2022.

How can I make the interest deduction for the student loan?

If you qualify, follow these steps to claim the interest deduction on the student loan.

  1. Find out how much interest you paid. To see how much interest you paid, find your Form 1098-E. The amount of interest you paid is listed on the form. If you’ve paid more than $ 600 in interest, your credit service provider will need to send it to you electronically or by mail. Remember that if there is no need to send you the form, you can also look at your bank statement or request the information from your lender.
  2. Request it in your tax return. To claim the interest deduction on the student loan, complete Form 8917 and submit it with your Form 1040 or 1040-SR. Enter the amount allowed on line 20 of Form 1040.

Other ways to reduce the cost of interest on your student loan

While the student loan interest deduction can save you a few hundred dollars, you can save even more interest by taking the following steps.

  • Refinance your student loans. Refinancing a student loan involves taking out a new loan from a private lender to pay off some or all of your existing government and private student loans. The new loan usually comes with different repayment terms and a lower interest rate. When you get a lower price, it could help you save a lot on interest. It’s important to note that by refinancing your federal student loan into a private student loan, you will lose access to certain federal benefits, including student loan issuance, deferral, and income-driven repayment plans (IDR).
  • Consolidate federal student loans. With a direct consolidation loan, you can Merge multiple federal student loans into one with a single monthly payment. While this doesn’t necessarily lower your interest rate, a shorter term can help you pay less interest.
  • Make additional loan payments. Another way to lower your interest costs is to make additional payments on your loan. To do this, consider reviewing your expenses and cutting back on unnecessary expenses such as: B. Cable or a gym membership. Then reallocate these funds to repay your student loan.
  • Avoid income-oriented repayment plans. If you have a government student loan, you may be eligible for an income-based repayment plan. IDR plans allow you to make payments based on your income and family size. While this plan could lower your monthly payments, in the long run it could increase the amount of interest you pay.
  • Avoid extending the repayment deadline. Similar to signing up for an IDR plan, this action can lower your monthly payment. The downside, however, is that extending the loan term can increase the amount of interest you pay over the life of the loan.

If you choose to refinance your student loan, Credible makes it easy for you to Compare rates from multiple lenders.

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