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What Is the Student Loan Interest Deduction? A Simplified Overview

What is the student loan interest deduction and who is eligible to claim this IRS tax write-off?

A photo of tax deduction forms for the student loan interest deduction blog article

Many college students are no strangers to student loans. A common source of financial aid, U.S. News & World Report indicates that the average student loan debt for college grads is now over $30,000. This is a 26% increase over what the typical student owed roughly a decade ago.

Repaying student loans involves not only paying back the original amount borrowed but also any accrued interest. If you are currently paying interest on a student loan, you may be interested in learning more about the federal government’s student loan interest deduction.

The Student Loan Interest Deduction Explained

Under Topic No. 456, the Internal Revenue Service (IRS) shares that the student loan interest deduction allows individuals to deduct up to $2,500 in interest paid on qualified student loans during the tax year. This deduction applies to interest that you were required to pay as well as any interest that you voluntarily chose to pay in advance.

Notice that the deduction is only for “qualified” student loans. According to the IRS, a qualified student loan is a loan taken out solely for “qualified” higher education expenses for you, your spouse, or your dependent. This loan must also be for the education of an “eligible” student.

Does this definition make your head spin? If it does, it’s certainly understandable. That’s why it’s necessary to dig a bit deeper to learn more about how the IRS defines all of these requirements.

Defining the Terms “Qualified” and “Eligible”

In chapter four of Publication 970, the IRS explains that a loan from someone you are related to or that is received under a qualified employer plan does not meet the qualified loan standard. So, if your grandparents loaned you money to pay for your education, for instance, you cannot deduct any interest you paid on those monies under the student loan interest deduction.

What does the IRS consider qualified higher education expenses? Tuition, fees, room and board, books and supplies, and transportation to and from class are all qualified expenses. That said, if any of these items were covered under other tax-free programs, such as tax-free scholarships and fellowship grants, they must be reduced.

Additionally, an eligible student is defined as “a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.” If enrolled less time than that, the deduction cannot be taken.

Income-Based IRS Deduction Eligibility Requirements

If all of the above conditions are met, this still doesn’t mean that you qualify for the student loan interest deduction as one other eligibility requirement must also be met. This requirement is related to income.

For the 2020 tax year, if your modified adjusted gross income (MAGI) was less than $70,000 as an individual or $140,000 if filing jointly, you qualified for the deduction. If your MAGI was more than these amounts, the deduction would start to be reduced.

Taxpayers with a MAGI that exceeded $85,000 individually or $170,000 jointly were unable to claim this deduction at all. That makes this program similar to other forms of income-based student financial aid programs.

How to Claim the Student Loan Interest Deduction

The first step to claiming the student loan interest deduction is making sure you meet the MAGI qualification. Once you verify that you do, you must then calculate how much you paid in student loan interest.

The IRS provides a Student Loan Interest Deduction Worksheet to help you do both. Institutions that receive interest payments exceeding $600 for the year are also required to send you Form 1098-E. This form is known as a Student Loan Interest Statement and contains the amount of student loan interest the institution received from you that calendar year.

Remember that the maximum deduction allowed is $2,500 for the tax year, so you cannot deduct more than this amount. And if you paid less, it is the lesser amount that is deducted.

Have More Questions about the Student Loan Interest Deduction (or Financial Aid)?

Like many tax-related programs, the student loan interest deduction can be somewhat confusing. The use of numerous ambiguous terms such as “qualified” and “eligible” doesn’t help when you’re trying to figure out whether this particular program applies to you.

Checking with your tax advisor can help you determine what type of relief you can get on your educational expenses. You can also contact Saint Leo University’s Student Financial Services Office to learn more about your financial aid options.

Our staff will help in any way we can, connecting you to the resources designed to make your educational pursuits more affordable given your situation and income. You can contact the office by phone at (800) 240-7658 or via email at SFS@saintleo.edu.

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