Understanding the Student Loan Interest Tax Deduction

Student loan borrowers have a special way to maximize their tax refunds and reduce the pain of filing their taxes. The federal income tax deduction for student loan interest allows people struggling with student debt to deduct up to $2,500 of the interest they pay on their student loans for the year on their taxes.

If you’ve got student debt and qualify to do so, use this deduction to lower your tax bill and make repaying your student loans more manageable. To qualify to deduct your student loan interest, you need to understand the parameters set by the IRS.

Types of Student Loans That Qualify for the Interest Tax Deduction

This tax deduction is generally available to someone whose student debt is considered a “qualified education loan,” as defined by the IRS. These are loans taken solely to pay “qualified” education expenses that were:

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

Federal student loans, such as Direct Unsubsidized and Subsidized Loans, PLUS Loans, Perkins Loans, and FFELP loans, are all considered qualified student loans. In addition, many private student loans also qualify, though those taken from sources such as a related person or specific employer-funded plans do not.

Who can take the student loan interest deduction?

Generally, you can deduct up to $2,500 of the student loan interest you pay each year from your taxable income, resulting in lower taxes and a bigger tax refund. To qualify, you need to meet all of the following requirements:

• Your federal income tax filing status is any filing status except married filing separately;
• No one else is claiming you as a dependent on their tax return;
• You are legally obligated to pay interest on a qualified student loan; and
• You paid interest on a qualified student loan directly to the loan holder.

You can deduct all interest you paid during the year on your student loan, including voluntary payments until the loan is paid off. You cannot, however, deduct any amount deductible under any other provision of the tax law or that was paid from tax-free distributions from a qualified tuition program such as a 529 Plan.

Income Limitations for Student Loan Interest Tax Deduction

The maximum amount of income that the IRS allows for this deduction varies from year to year. It is based on whether you are single or filing jointly with a spouse.

For the 2022 tax year, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing jointly), you can take advantage of a student loan interest deduction. However, if your MAGI falls between $70,000 and $85,000 ($175,000 if filing jointly), the deduction amount will be lower than the maximum of $2,500.

Borrowers with modified adjusted gross income above $85,000 ($175,000 if filing jointly) do not qualify for the student loan interest tax deduction.

Though the student loan interest tax deduction won’t result in a windfall, there’s no good reason to leave money on the table. Consult with a tax professional to see if you qualify for this deduction, to get the most accurate guidance based on your circumstances.