When you borrow money for college, the interest rate attached to your student loans will largely dictate how high your monthly payments will be. Federal student loans typically charge less interest than private loans, and the interest rate on a federal loan is fixed for the duration of your repayment period. Private student loan interest rates can fluctuate while you’re repaying your debt, which means your monthly payments can vary from year to year.
Many people don’t pay much attention to the amount of interest they’re paying on their student loans. Rather, they write out a check to their loan servicer every month and call it a day. But if you’re in the process of repaying student debt, you should know that you could get a pretty nice tax break as a result.
Deducting your student loan interest
Depending on your tax filing status and how much money you earn, you may be eligible to deduct up to $2,500 in student loan interest on your taxes each year. When you take a tax deduction, it means you exclude a portion of your income from taxes, thereby lowering your tax burden as a whole.
To qualify for the student loan interest deduction, you must have a student loan out in your own name. You also can't be claimed as a dependent on someone else's tax return, and your tax-filing status can’t be married filing separately.
Assuming you meet these criteria, you can deduct up to $2,500 in student loan interest, depending on your income. If you're a single tax filer, you can claim your student loan interest deduction in full if your modified adjusted gross income (MAGI) falls below $70,000. A MAGI between $70,000 and $85,000 will give you a partial deduction, but you can no longer deduct student loan interest once your MAGI exceeds $85,000.
If your filing status is married filing jointly, you can claim the student loan interest deduction in full with a MAGI below $140,000. A MAGI between $140,000 and $170,000 will give you a partial deduction, but once your MAGI exceeds $170,000, the deduction is no longer in play.
Another thing you should know about the student loan interest deduction is that you don’t need to itemize on your tax return to claim it. In most cases, you can only claim deductions when you itemize. For instance, the interest you pay on your mortgage is deductible as well, but if you don’t itemize on your tax return, it’s off the table. There’s an exception, however, for student loan interest, making the deduction far more accessible to tax filers on the whole (keeping in mind that most people who file a tax return take the standard deduction and don’t actually itemize).
How much student loan interest do you pay?
Each student loan statement you receive from your lender should indicate how much of your monthly payment is going toward the principal portion of your loan, and how much is going toward interest on that debt. Furthermore, you should receive an annual student loan interest statement called Form 1098-E, which summarizes your student loan interest for the year.
Typically, your lender will only send out that form if you paid more than $600 in interest over the course of the year. But you can still claim the student loan interest deduction if you paid less than that -- you just need to reach out to your loan servicer to get an exact total for the interest you paid.
Although it stinks to lose money to student loan interest, it helps to know that you could snag a tax break from it. Just remember that the criteria for claiming the student loan interest deduction can change from year to year, so consult the latest IRS updates before filing your tax return.