Is student loan interest tax deductible?

If you took out student loans to pay for college, you might qualify for the student loan interest deduction. It allows you to subtract some interest paid on your school loans from your tax return.

The student loan interest deduction is an above-the-line deduction, which means it will decrease your taxable income. You can claim the tax deduction without itemizing, and it will reduce your adjusted gross income, so you pay fewer state and local taxes.

Is student loan interest tax deductible?

Yes. When you're filing your taxes, you can deduct up to $2,500 in student loan interest paid during the 2020 tax year. And since it’s an above-the-line deduction, you don’t have to itemize your deductions.

However, it’s important to note that the tax deduction is available per filing, not per person. So if you’re married and you and your spouse both made student loan interest payments, you’re still only able to deduct up to $2,500.

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Why is my student loan interest not tax-deductible?

There are a couple of situations where you may not qualify for the student loan deduction. If you’re listed as a dependent on someone else’s tax returns, then you’re ineligible for the deduction. And if your filing status is married filing separately, you won’t be eligible.

And certain types of student loans will not qualify for the interest deduction. For instance, if you took out an education loan from a friend or family member, this won’t qualify. You must have a qualified student loan servicer.

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How to qualify for student loan interest deduction

To qualify for the student loan interest deduction, you’ll start by calculating your modified adjusted gross income. If your income falls below the threshold, then you are eligible for the full deduction. From there, you can deduct the interest paid on any qualified student loans.

According to the IRS, a qualified student loan meets the following criteria:

• The loan was taken out by you, your spouse, or a dependent. However, if your child is legally obligated to repay the loan, you’re not allowed to claim the tax deduction.
• When you took out the loan, you were enrolled at least part-time at an accredited public, private, or non-profit school. You can access a full list of eligible schools on the Department of Education’s website.
• You used the loan to pay for qualified educational expenses, such as tuition, fees, books, and supplies for your courses.
• You used the loan within a reasonable time frame after receiving the funds.

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Is it worth it to deduct student loan interest?

The student loan interest deduction is a good opportunity to reduce your taxable income and save some money. However, the amount of interest you can deduct depends on your income and how much you paid during the year.

If your income is above a certain threshold, you’ll no longer qualify for the deduction. You can determine whether you’re eligible by calculating your modified adjusted gross income (MAGI).

If you’re single, you’ll start phasing out once your income surpasses $70,000 annually. Once you earn more than $85,000 a year, you’ll no longer be eligible for the deduction. For married couples, you’ll start to phase out once your annual income is between $140,000-$170,000.

Do you still have questions about tax situations and what you qualify for? Consider reaching out to a tax professional or financial advisor for help.

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How much money can I save with loan refinance?

If you’re eligible for the tax deduction, you can save up to $2,500 per year on your taxable income. And if you’re looking to lower your student loan payments even further, you might want to consider refinancing your private student loans.

When you refinance, you’ll consolidate multiple student loans and refinance the entire loan balance at a lower rate. Since you’ll pay less money in interest, you’ll be saving money over the life of the loan.

However, if you refinance federal student loans, you’ll lose access to certain borrower protections, like income-based repayment plans and loan forbearance. And right now, federal student loan borrowers already have access to a grace period through September 2021 due to the coronavirus pandemic.

You can use this student loan refinancing calculator to check your rates and get a sense of how much you can save and what your new monthly loan payment could be.