There are several good tax breaks available to college students. For example, if you paid tuition in 2016, you might be able to claim the American Opportunity Credit or one of the other tuition tax breaks. If you took out student loans to help finance your education, another deduction you may be able to take advantage of is the student loan interest deduction, which could help lessen the burden of your student debt for years to come.

What is the student loan interest deduction?

If you paid interest on a student loan last year, there is a tax deduction you may be able to take advantage of. As of the 2016 tax year, you can deduct the actual amount of interest you paid on student loans, or $2,500, whichever is less, from your adjusted gross income. This can be a valuable tax break to millions of Americans with student loan debt -- for instance, if you paid over $2,500 in student loan interest in 2016 and are in the 25% tax bracket, this translates to $625 in tax savings.

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Do you qualify?

Some of the requirements for the student loan interest deduction are quite obvious. For example, you must have paid interest on a qualified student loan during the tax year. Other requirements to claim the deduction include:

  • You're legally obligated to pay the interest.
  • You aren't married filing a separate tax return.
  • Your modified adjusted gross income (MAGI) must be less than $65,000 single/$130,000 married filing jointly to claim the full deduction for the 2016 tax year. Above those thresholds, the deduction begins to phase out and disappears completely above $80,000 and $160,000 for single and married joint filers, respectively.
  • You and your spouse, if applicable, cannot be claimed as dependents on someone else's tax return.

For the purposes of the student loan interest deduction, a "qualified" student loan refers to a loan you took out for the sole purpose of paying qualified higher education expenses. It must have been taken for you, your spouse, or someone who was your dependent at the time the loan was taken, and the education expenses must have been paid for within a reasonable period of time before or after the loan was originated.

In other words, you can't take out a loan in 2017 and claim that its purpose was to pay education expenses incurred in 2014, or that you may incur at some point in the future, and claim the deduction.

The best part: You don't need to itemize to claim the deduction

Most tax deductions can only be taken if you choose to itemize on your 1040, rather than take the standard deduction. However, the student loan interest deduction is part of a small group of tax breaks that aren't technically deductions, but are considered to be "adjustments to income." You can read about the others here.

Basically, this means that you can take advantage of the student loan interest deduction even if you don't itemize. Even better, the deduction will lower your adjusted gross income (AGI), on which several other tax benefits are based.

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