The average student loan payment is between $200 and $299 per month, according to the latest data from the Federal Reserve. That adds up to $2,400 to $3,588 per year, and not all of that goes toward reducing your principal. You also have to pay interest on what you borrowed.
Fortunately, the government enables you to claim a student loan interest deduction to help you save a little on your taxes each year while paying down your debt. Here are three key things you need to know if you plan to claim it.
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1. It's not open to everyone
There are several criteria you have to meet to deduct your student loan interest payments on your taxes. They break down into the following categories:
Loan qualifications
You can only claim the student loan interest deduction on qualified loans that check all the following boxes:
- They were solely for higher education expenses.
- They weren't from a relative or a qualifying employer plan.
- You paid or incurred the interest within a reasonable time before or after taking out the loan.
Student qualifications
Individuals hoping to claim the student loan interest deduction must meet the following criteria as well:
- The loan was for you, your spouse, or your dependent.
- You (or the student, if the loan was for someone else) were enrolled at least half-time during the academic period, according to the standards set by the academic institution.
- You aren't filing taxes as married filing separately.
- You aren't claimed as a dependent on anyone else's tax return.
- You are legally obligated to pay interest on a qualifying student loan.
- You paid interest on a qualifying student loan.
- Your income doesn't exceed the modified adjusted gross income (MAGI) limit for the year (see below).
In addition, those who qualify for student loan assistance through their employers cannot deduct any interest their employer paid on their behalf.
2. The credit is worth a maximum of $2,500
The IRS enables most people to deduct up to the lesser of $2,500 or the total amount they paid in student loan interest during the year. But the rules are a little different for high earners.
Those with high MAGIs might have a lower maximum credit, or they might not be able to claim the student loan interest deduction at all. The following table shows what you can expect based on your MAGI and tax filing status if you claim this credit for 2023.
|
Single, Head of Household, or Qualifying Widow(er) |
Married Filing Jointly | |
|---|---|---|
|
Eligible for the full deduction |
MAGI under $75,000 |
MAGI under $155,000 |
|
Eligible for a reduced deduction |
MAGI between $75,000 and $90,000 |
MAGI between $155,000 and $185,000 |
|
Not eligible for the deduction |
MAGI greater than $90,000 |
MAGI greater than $185,000 |
Source: IRS.
If you're still not sure if you qualify based on this, the IRS has a tool you can use to determine whether you're eligible for the deduction.
Keep an eye on these income limits in future years, especially if you're right on the cusp of being eligible. The limits might rise in future years, enabling you to claim a larger student loan interest deduction than you can today.
3. You don't have to itemize deductions
The student loan interest deduction is considered an adjustment to your income, so you don't have to itemize deductions to claim it. Filers who use the standard deduction will still be able to use this to reduce their tax bill.
How to claim the student loan interest deduction
To claim the student loan interest deduction, you must indicate how much you have paid in student loan interest during the year when you file your taxes. If you're hiring a tax professional, all you need to do is provide them with this information. Your student loan lender should give you some sort of form showing what you paid throughout the year around tax time.
If you're using tax filing software, it should ask you whether you paid any student loan interest during the year. You can enter the amount, and the software should calculate what kind of a deduction you're eligible for automatically.
Even though it might only shave a few hundred to a few thousand dollars off your taxable income, it's worth claiming this credit every year that you're eligible. It could increase the size of your tax refund, which you can use to help pay off your student loan balance even faster so you can focus on other long-term goals, like retirement.
