Is my student loan deductible?

With secondary education costs on the rise, millions of taxpayers pay substantial amounts of interest on their student loan debt every year. 70% of U.S. college students use loans to pay for their education. The average student’s loan amounts to $37,000. Although the 2017 Tax Cuts and Jobs Act limited many deductions, taxpayers with qualified student loan payments can deduct up to $2,500 of interest paid per tax return. If you or your dependent has received a form 1098-E, you may be able to pay less in taxes.

Claiming your Student Loan

Recent changes to the tax code have caused fewer taxpayers to itemize. This does not limit your ability to claim student loan interest as a deduction. “Above the line deductions”, meaning deductions subtracted from your income before the adjusted gross income is calculated for tax purposes, such as the student loan interest deduction, are separate from itemized deductions. Because above the line deductions directly reduce adjusted gross income, they greatly reduce taxes owed regardless of itemized deductions. It’s important to consider that the student loan interest deduction has AGI limitations. For single and head of household filers, this deduction completely phases out at an AGI of $80,000. Taxpayers who are married filing joint are limited to an AGI of $165,000. Anyone over these limits will not be able to deduct student loan interest paid in that tax year.

There are many types of loans, and only qualified student loans apply for this deduction. According to the IRS, a qualified student loan must be:

  • For you, your spouse, or a person who was your dependent when you took out the loan;
  • For education provided during an academic period for an eligible student; and
  • Paid or incurred within a reasonable time period before or after you took out the loan.

Who qualifies for tax deduction?

Both federal and private loans may qualify for this tax deduction, so it is important to make a choice that best fits your situation. Federal loans such as the Stafford loan, typically have low interest rates, and are paid by the government while the student is enrolled in school. Private loans generally require good credit history and a co-signer to obtain. These loans are often given at a higher interest rate and have negative implications if the student is unable to make timely payments.

Dependency status is important when planning how to finance education costs. A student 23 or younger will be a dependent student in most cases. In order to be classified as an independent student, the filer must be at least one of the following:

  • 24 or older
  • Married or claiming a dependent
  • In a master’s or doctorate program
  • Serving active duty U.S. armed forces or a veteran
  • An orphan
  • Homeless or an emancipated minor

Applying for Financial Aid

When applying for Financial Aid, independent students can borrow thousands more per year than those classified as dependent. A dependent student is less likely to receive need-based aid such as a grant. Taxpayer’s cannot claim the student loan interest deduction if they are claimed as a dependent, but interest paid can be deducted by the parents. While it is not typically beneficial to be a dependent student, dependency status is not at the discretion of the taxpayer. Private loans are often the only option for dependent students whose parent’s income is above a certain threshold. It is important to contact FAFSA (Free Application for Federal Student Aid) directly for specific questions and special circumstances regarding federal aid.

Most Americans have debt. Student loans account for the second largest debt category of U.S. households. While it is generally better not to have debt, the reality is that most college students will make payments on education related loans for years. Therefore, it is important to take this deduction every year for the life of the loan. If you have questions about your student loans and how they impact your tax return, call or email us today.

Austin Long
Tax Professional

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