How to get your student loan interest deduction

How to get your student loan interest deduction
Written by Publishing Team

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The student loan interest deduction allows you to subtract up to $2,500 from your taxable income for the interest paid on student loans. (iStock)

If you have student loans, paying for college doesn’t end when you leave school. Paying off student loans can cost thousands of dollars in interest each year, depending on the loan balance, interest rate, and repayment term.

The student loan interest deduction is one tax credit that mitigates the costs of higher education by reducing federal taxable income by up to $2,500. Because it’s an above-the-line deduction, you can claim it even if you don’t itemize your deductions when you file your taxes.

This discount may be available if you pay interest on a qualifying student loan and meet certain requirements. Here’s what to know about how the student loan interest deduction works, who qualifies for it, and how to claim it.

Refinancing can also help reduce student loan interest costs, so it might make sense to do so Compare rates from several lenders Using a marketplace like Credible.

How does the interest deduction on a student loan work?

a tax deduction It allows you to subtract a certain amount from your taxable income before calculating your tax liability. For example, let’s say your taxable income is $50,000 and you qualify for the maximum student loan interest deduction of $2,500. It will reduce your taxable income to $47,500, which could reduce your federal tax liability.

You may be able to claim a student loan interest deduction if:

  • You have made required or prepaid interest payments on an Eligible student loan.
  • The loan is for yourself, a spouse or a dependent.
  • The student is enrolled in an eligible college. A qualifying loan can be a federal or private student loan. Money you receive from a relative or eligible employer’s plan does not qualify.
  • Universities, colleges, vocational schools, and other accredited public and private post-secondary institutions are considered eligible schools if they qualify to participate in the Student Assistance Program administered by the US Department of Education.

Who can take the student loan interest deduction?

Only borrowers who meet all eligibility requirements can receive a student loan interest discount. If you are married, your registration status must be married – you cannot take this deduction if you and your spouse file separately. And your average marginal gross income (MAGI) – income before any interest on a student loan is subtracted – must be less than a certain amount.

In addition, it must meet the following requirements:

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

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

  • $85,000 If your application status is single, head-of-house or widowed, you are eligible
  • 170,000 dollars If your registration status is married filing together

Keep in mind that these limits can change for 2021 taxes, which will be due in April 2022. If you need help, the IRS has Interactive Tax Assistance Tool on their website to help determine if you qualify for the student loan interest deduction.

If you’re considering refinancing as a way to lower your student loan interest costs, Credible makes it easy Compare rates from several lenders.

How much can I deduct interest on a student loan?

The maximum student loan interest deduction is $2,500. If you qualify, the amount you can deduct will depend on these factors:

  • your maggie
  • How much interest you paid on your student loans
  • The amount of interest you are allowed to deduct

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

But if your MAGI falls within the phase-out range, the amount of interest you can deduct will be less.

Here are the phase-out ranges for the 2020 tax year:

  • $70,000 and $85,000 If your application status is single, head-of-house or widowed, you are eligible
  • $$140,000 and $170,000 If your registration status is married, you can register together

Again, these limits may differ for the 2021 tax year.

Forbearance on student loan and tax deduction

If you have Student loan at federal forbearance, The interest is waived and payments are held until January 31, 2022. This means that if you continue to make payments this year, they are transferred directly to your primary balance. Since you have not paid any interest on this loan, you cannot claim the student loan interest deduction for this loan.

But once the interest starts accumulating again on February 1, 2022, and loan payments resume, you may be able to claim the student loan deduction when you file for taxes for 2022.

How do I get the student loan interest deduction?

If you qualify, here’s what you must do to claim the student loan interest deduction.

  1. Find out how much interest you paid. To determine how much interest you paid, find your Form 1098-E. The amount you paid in interest is listed on the form. If you have paid more than $600 in interest, the loan provider must mail it to you electronically or by mail. Keep in mind that you can also view your account statement or request information from the lender if the form is not required to be sent to you.
  2. Claim it on your tax return. To claim the student loan interest deduction, complete Form 8917 and submit it with Form 1040 or 1040-SR. Enter the allowable amount on line 20 of Form 1040.

Other ways to reduce student loan interest costs

While the student loan interest deduction can help you save a few hundred dollars, taking the following actions can help you save more interest.

  • Refinance your student loans. Student loan refinance It involves getting a new loan with a private lender to pay off some or all of your existing federal and private student loans. A new loan usually comes with different repayment terms and a lower interest rate. If you receive a lower rate, it can help you save a lot of benefit. It’s important to note that refinancing your federal student loans into a private student loan will result in you losing access to some federal benefits, including student loan forgiveness, forgiveness, and income-driven repayment plans (IDRs).
  • Consolidation of federal student loans. Direct Consolidation Loan allows you to do just that Combine multiple federal student loans into one loan With one monthly payment. Although it doesn’t necessarily lower your interest rate, choosing a shorter repayment period may help you pay less interest.
  • Pay additional loan payments. Another way to reduce interest costs is to make additional payments on your loan. To do this, consider reviewing your expenses and cutting any unnecessary expenses, such as a cable or gym membership. Then, reallocate that money to pay off your student loan.
  • Avoid income-driven payment plans. If you have a federal student loan, you may qualify for an income-driven repayment plan. IDR plans allow you to make payments based on your income and family size. Although this plan may lower your monthly payments, it may increase the amount of interest you pay in the long run.
  • Avoid extending payment terms. Similar to enrolling in an IDR plan, taking this action may lower your monthly payment. But the downside is that extending the loan repayment period can increase the amount of interest you pay over the life of the loan.

If you choose to refinance your student loans, Credible makes it easy Compare rates from several lenders.

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