The $2,500 Tax Break for Paying Your Student Loan

If you paid student loan interest last year, you could qualify for a tax deduction worth up to $2,500. You won’t receive that money back as a refund since the student loan interest deduction isn't a tax credit, but taking advantage of the deduction can help you reduce your taxable income.

However, the IRS has strict rules for who can claim the deduction, and not everyone qualifies for the maximum amount.

So, how much student loan interest — if any — can you deduct this year? Here’s what you need to know.

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Student loan interest deduction 

The student loan interest deduction is among the most overlooked tax deductions, but qualifying for this tax break might be easier than you think. For example, both private and federal student loans qualify, and both required and voluntary interest payments are deductible. 

Also, current students and graduates can benefit from the deduction, and in some cases, you can deduct student loan interest even though a parent pays your loan. Parents who took out student loans for their dependents are also often eligible (more on that below).

And while only student loans taken out solely to pay higher education expenses qualify, most types of education expenses are eligible.

• Tuition and fees are qualified education expenses
• Room and board expenses qualify
• Loans used for books, supplies, and equipment qualify
• Even transportation expenses qualify

Is student loan interest an itemized deduction? There is no need to itemize deductions to claim student loan interest. You can claim the student loan interest deduction even if you take the standard deduction. 

Qualified education expenses and institutions: The student loan interest deduction isn’t limited to four-year college students. For the deduction, any of the following postsecondary educational institutions qualify if they are eligible to participate in a student aid program administered by the U.S. Department of Education.

• Colleges (includes community college)
• Universities 
• Vocational schools
• Institutions that conduct internships or residency programs that lead to a degree or certificate from one of the above institutions or a hospital or healthcare facility that offers postgraduate training

Additionally, the IRS says the student loan interest must have been “paid or incurred within a reasonable period before or after you took out the loan.” However, you can only deduct student loan interest for the year you paid it. 

Who can deduct student loan interest? 

To deduct student loan interest, you must have taken out the loan for yourself, your spouse, or someone who was your dependent when you took out the loan. (A dependent generally refers to a qualifying child or qualifying relative.) So, paying interest on a loan taken out for your child typically counts for purposes of the deduction. 

Can you deduct student loan interest if you didn’t make any payments? In some cases, you can claim the student loan interest deduction even if you were not the one to make payments (for example, if a parent made loan payments on your behalf). To deduct loan interest paid by a parent or anyone else, all of the following must be true:

• You must be legally responsible for repaying the loan.
• You can no longer be claimed as a dependent.
• Your filing status is not married filing separately.

(Note: The above criteria apply even if you made payments on your own student loans.) 

Income limit for the student loan interest deduction 

There is one more test for qualifying for the student loan interest deduction, and it’s based on your modified adjusted gross income (MAGI). The income limit is set annually for each filing status. Here are the 2023 income and phase-out limits:

How much student loan interest can you deduct? You might not qualify for the full $2,500 deduction even if your MAGI falls below the amount set for your filing status. That’s because $2,500 is the maximum amount you can deduct each year. Your deduction is limited to the actual amount of student loan interest you paid during 2023. 

• So, if you paid $800 in student loan interest, your deduction is limited to $800. 
• And if you paid $3,000 in interest, you won’t be able to deduct more than $2,500.

Student loan interest deduction form 

You should receive Form 1098-E from your lender if you paid $600 or more in student loan interest last year. However, you can still deduct student loan interest if you do not meet the $600 threshold. So, if you made student loan payments but haven’t received a Form 1098-E for 2023, it’s a good idea to contact your loan servicer and request a statement of interest paid. Some borrowers may be able to find this information by visiting their online account. 

If you still have doubts about whether or not you qualify for the student loan interest deduction this year, you can visit the IRS Interactive Tax Assistant (ITA) tool for answers. The process will take approximately 10 minutes, and you will need the following information before you begin.

• Filing status
• Basic income information
• Your adjusted gross income (AGI)
• Educational expenses paid with nontaxable funds

MAGI limits for taking the student loan interest deduction are inflation-adjusted each year. So, if you don’t qualify for 2023, you might be able to claim the deduction next year. Additionally, there are several other education tax breaks, including the Lifetime Learning Credit and American Opportunity Credit, available to students and graduates. 

For more information about tax breaks for college students and their families, see Kiplinger's report Eleven Education Tax Credits and Deductions.

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