Student Loan Interest Tax Deduction | What You Need to Know

December, 05 2024 by Glynis Miller, CPA, MST

If you have been considering furthering your education, that is a huge decision! If so, you may be concerned about taking on student loan debt. However, if your new career is sustainable, don’t let student loan payments get in your way. 

Now, let’s discuss the facts about taxes. If you have qualified student loan interest, you may be able to take a deduction for a portion of what you paid on your federal income tax return. It may sound simple, but the rules can make it complicated.
 

Here’s what you should know:

Like other education-related tax benefits, student loan interest deductions may not be available to individuals who are considered high-income earners. Instead, the deduction was designed to reduce the tax burden for low- to moderate-income earners. The deduction amount claimed can vary and will be completely phased out by design. If completely phased out, your deduction is reduced to zero for the current year in question. In setting limits, the IRS does not consider a taxpayer’s gross income but instead looks at a taxpayer’s modified adjusted gross income (MAGI) to set the limitations.

It is important to understand how MAGI is determined; it is figured by taking the adjusted gross income as shown on your tax return and adding back some of the deductions that were allowed in the calculation of adjusted gross income. Those add-backs include any allowable IRA contributions, one-half of any self-employment taxes, qualified tuition expenses, the allowable student loan interest, and others.
 

Here is a list of general guidelines for the deduction: 

• You must have paid the student loan interest for the tax year. 
• You cannot be a dependent claimed on someone else’s tax return. 
• You must have the legal obligation to pay the interest on a qualified student loan. 
  • You cannot make loan payments for another person and attempt to claim a deduction for it on your tax return. 
• Your tax filing status cannot be MFS (Married Filing Separately).
  • Your filing status must be Single, Head of Household, Married Filing Joint, or Qualifying Surviving Spouse. 
• Your loan meets the certain requirements to be a qualified student loan debt.
  • A qualifying student loan, as defined by the IRS, is a loan obtained with the sole intent of paying qualified education expenses for yourself, a spouse, or someone qualifying as your dependent when the loan was first taken out. 
  • They can be a federal or private loan (except from a relative) and cannot be from any tax-advantaged retirement accounts.
  • Private loans must be used to pay for the qualified education in a reasonable amount of time (the IRS has not identified what “reasonable” means). The facts and circumstances of each case may be separately viewed to determine reasonableness.
• Qualified education expenses include:
  • College Tuition and Fees
  • Room and Board (can be on-campus or off-campus with specific rules and based on the specific university or college established amounts)
  • Required books and supplies set by the school
  • Various other expenses as required to get an education

Student Loan Interest Deduction Income Limit

The single, head of household, or qualifying surviving spouse filer with a MAGI of less than $80,000 could be allowed up to the full amount of the credit. However, married couples filing a joint tax return must have a MAGI of less than $165,000 to receive a full credit. And no student loan interest deduction is allowed for the single, head of household, or qualifying surviving spouse taxpayers with a MAGI over $95,000 or married couples that file a joint return with a MAGI over $195,000.
 

Student Loan Interest Deduction Phase-Out

For taxpayers with MAGI between the two limits for each filing status, the credit can be phased out as income increases from the low end of MAGI to the high end. This means that the phase-out range for single, head of household, and qualifying surviving spouses will be the MAGI between $80,000 and $95,000, while the phase-out range for married taxpayers filing joint returns is when the MAGI is between $165,000 and $195,000.
 

Maximum Student Loan Interest Deduction

If a taxpayer has taken out a qualifying student loan and pays qualifying student loan interest during the tax year, a maximum deduction of $2,500 could be taken. However, to take the deduction, the taxpayer must consider the following factors:
 

• Amount of qualifying student loan interest paid
• Deduction income limits based on filing status
• Deduction phase-out based on filing status and income limitations

A taxpayer should first determine how much student loan interest they paid in the tax year. Generally, a taxpayer will receive Form 1098-E from the loan servicer, which will indicate the amount of interest they received for the year. If a taxpayer has more than one Form 1098-E, all interest can be added up to determine the total interest paid. If they qualify for the credit, they cannot take a credit larger than the amount of interest paid.

The maximum amount a taxpayer can deduct per tax return in 2024 will remain at $2,500. For 2024 tax returns (to be filed in 2025), the deduction will begin to phase out at $80,000 ($165,000 for joint filers), meaning that once your Modified Adjusted Gross Income reaches this value for the year, the amount that you could claim for the Student Loan Interest deduction gradually decreases. The deduction will be completely phased out at $95,000 ($195,000 for joint filers), meaning that if your MAGI reaches or exceeds this value, your Student Loan Interest will be ineligible to be claimed as a deduction.

So, if you are a single filer, making under $80,000 for the year and also meeting all other requirements, you could deduct student loan interest payments up to the maximum of $2,500. However, you can only claim the student loan interest as a deduction for the actual amount paid for the year. So, if you only paid $1,200 in interest for the year, then you can deduct up to that amount on your tax return. If you are interested in mulling over some numbers, the IRS website has a tool located at https://www.irs.gov/help/ita/am-i-eligible-to-claim-an-education-credit that can help you determine if you meet all the eligibility requirements for this deduction or any other education credits.