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Student Loans Are Tax Deductible, but Here's What to Know

Are Student Loans Tax Deductible? Here's Everything You Need to Know

Young woman and her mother talk with a female bank employee about a student loan.

If you have student loans, one of the only positives is knowing you are nowhere near alone. These days, two out of three college graduates leave school with student loan debt. And during tax season, you probably wonder if those monthly payments will benefit you in your tax return. The short answer? Sort of.

"The only portion of a student loan that is tax-deductible is the interest," Eileen Maki, Tax and Accounting Analyst at FitSmallBusiness.com, explained on her website. "Like any tax deduction, there are certain qualifications that must be met, as well as limitations on the amount that can be deducted."

What Are the Qualifications?

In order to deduct student loan interest, the loan must have been taken out during an academic period when you were enrolled at least half-time in a program that leads to a degree or recognised credential at an eligible institution. The money must have been used in a reasonable amount of time after the loan was taken out and spent on qualified education expenses like tuition and books, not travel and booze. And finally, your filing status cannot be married, filing separately.

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What Are the Limitations?

The deduction is capped at $2,500. But if you paid less than that in interest, you can only deduct what you actually paid, which includes voluntary prepaid interest payments as well as the required payments. "For example, if you paid $850 in interest on your student loans, you can only deduct $850, not the full $2,500," explained Maki. Additionally, if your income is too high, you might not be eligible for the full deduction. "Depending on the Modified Adjusted Gross Income (MAGI) of the taxpayer, the amount that can be deducted might be lower or eliminated entirely," added Maki.

How Do You Claim the Deduction?

The Student Loan Interest Deduction is claimed on IRS Form 1040 as an adjustment to your income, Maki explained, so the good news is you don't have to itemize your deductions. If you paid $600 or more in interest to a single lender, you should receive a 1098-E form in the mail. If you didn't get that form, that doesn't mean you aren't eligible for the deduction. Use the IRS online tool to see if you qualify for the Student Loan Interest Deduction, and call your lender for your records. One last positive note? "A tax deduction reduces your taxable income, which results in a lower tax liability," Maki said.

Tip: if this still sounds a bit overwhelming, make sure you consult a tax professional to help break everything down for you and to file your taxes to avoid any costly mistakes.

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