If you have student loans, here’s how to save more money on your taxes.
Student Loans & Taxes: Key Questions
Here are some of the top questions regarding student loans and taxes, according to Google:
- Are student loans tax deductible?
- How do I deduct student loan interest on my taxes?
- How do I get my tax money back from student loans?
- Do I qualify for education tax breaks?
Let’s start with one central principle regarding income taxes and student loans: if you made federal student loan payments last year, you may be able to save money on your federal income taxes this year.
1. Yes, you can typically deduct student loan interest
Focus on the student loan interest on your federal student loans that you actually paid last year.
How do you know how much interest you paid? Well, you should have that number memorized. (Kidding).
If you paid more than $600 in student loan interest last year, your student loan servicer will provide you with a Student Loan Interest Statement, also known as Form 1098-E. Remember, this is the amount of interest you paid on your federal student loans. It’s not your total student loan payment or the interest on your private student loans. If you paid less than $600 in student loan interest, contact your student loan servicer to provide you with the amount of student loan interest you paid.
More Than $600: you will receive a Form 1098-E detailing how much federal student loan interest you paid
Less Than $600: contact your student loan servicer to receive the amount you paid in federal student loan interest
2. Here’s how to contact your student loan servicer
You can visit www.nslds.ed.gov or call the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243; TTY 1-800-730-8913) to identify your student loan servicer.
Here is a list of student loan servicers for Direct Loans and for FFEL Loans:
3. The tax deduction you receive is capped at $2,500
The student loan interest deduction is capped at $2,500. This is true no matter how much interest you paid on your federal student loans. Also, the $2,500 maximum tax deduction is per income tax return, not per individual taxpayer.
What is a tax deduction?
- Lowers your income that is subject to income tax, which can lower your overall income tax bill.
- Considered an “above the line” tax deduction.
- Available whether you choose the standard deduction or itemized deductions.
More Than $2,500: capped at $2,500
Less Than $2,500: income taxes may be reduced based on amount of student loan interest actually paid
4. But Wait…there are income limitations
To qualify for the student loan interest deduction, there are certain income limitations, which vary depending if you are an individual or married tax filer.
Here’s the breakdown:
- Individual Tax Filers: Your modified adjusted gross income must be less than $80,000.
- Married Tax Filers: Your modified adjusted gross income must be less than $165,000.
Here’s the rule of thumb regarding “phase outs” – meaning above a certain income threshold, the benefit of the student loan interest deduction is reduced.
Individuals: $65,000 and above
Married: $135,000 and above
5. Don’t forget these other requirements.
To qualify for the student loan interest tax deduction, you also must:
- Be enrolled at least half time in a degree program.
- The loan must be for “qualified education expenses” such as tuition, books and supplies
- The person filing the taxes and the person who borrowed the student loan must be the same (unless you are claiming a qualified dependent or the person is your spouse).
Question: Going forward, should you take advantage of the student loan interest deduction or refinance your student loans?
It depends on whether you have federal student loans, your current interest rate, new interest rate and student loan balance, among other factors. While student loan refinancing will mean you no longer have federal student loans, the amount in interest you save may be higher than the tax benefit you receive from the student loan interest deduction.
You can use this student loan refinancing calculator to see how much money you can save from student loan refinance.
The amount you save from the student loan interest deduction, assuming the full benefit and maximum deduction, will be equal to $2,500 multiplied by your federal income tax rate. For example, an assumed 30% income tax rate means the value of the deduction may be $750.
Let’s assume you have $75,000 of student loans, an 8% weighted average interest rate and a 10-year repayment term. Now, let’s assume you can refinance your student loans to a 3% interest rate and a 10-year repayment plan. You could save $186 each month, which translates to $2,232 each year. In this scenario, the benefit of refinancing your student loans would significantly outweigh the tax deduction.
Of course, your specific financial circumstances are unique to you. So, it’s helpful to compare the potential financial benefit from the tax deduction to the financial benefit of student loan refinancing.
The student loan interest tax deduction is one tax benefit. Make sure to check other student loan tax benefits for which you may qualify as well.