The student loan interest deduction is a tax break for college students and their parents who took on debt to pay for school. It allows you to deduct up to $2,500 in interest paid from your taxable income.
Due to the ongoing pandemic, interest on most federal student loans has been paused since March 13, 2020. You can still deduct interest paid before that date on your 2020 taxes, as well as interest on loans that weren't eligible for this relief, like private student loans.
Is student loan interest deductible?
Student loan interest is deductible if your modified adjusted gross income, or MAGI, is less than $70,000 ($140,000 if filing jointly). If your MAGI was between $70,000 and $85,000 ($170,000 if filing jointly), you can deduct less than than the maximum $2,500.
The student loan interest deduction is not an itemized deduction — it's taken above-the-line. That means it's subtracted from your taxable income to save you money. For example, if you fall into the 22% tax bracket, the maximum student loan interest deduction would put $550 back in your pocket.
If you qualify, you can take both the student loan interest deduction and the standard deduction.
» MORE: Tax deductions guide for 2020
Who can deduct student loan interest?
If your MAGI is less than $85,000 ($170,000 if filing jointly), you can deduct student loan interest paid on federal and private student loans in the following instances:
You used the loan for qualified education expenses. These include tuition, room and board, books and other necessary expenses, such as transportation.
You took out the loan for your own education. This deduction isn't just for graduates doing taxes: If you’re an overachiever who is making student loan payments while still in school, you may be able to take this deduction too.
You took out the loan for someone else's education. If you took out a loan in your own name for someone else — like a parent PLUS loan for your child, for example — you can take the student loan interest deduction.
You were forced to repay the loan. Even if your wages are being garnished or you're otherwise legally obligated to repay a loan, you can still deduct any interest you've paid off.
You can't claim the student loan interest deduction if your filing status is married filing separately. You're also ineligible if you’re listed as a dependent on someone else's tax return.
Student loan interest deduction form
If you paid more than $600 in interest in 2020, you will automatically receive form 1098-E — a student loan interest deduction form — in the mail or by email.
You may have paid less than that amount because interest rates on federally held loans were frozen at 0% and payments were suspended for most of the year. But you can still deduct whatever you did pay if you otherwise qualify.
If you don't receive a student loan interest deduction document, ask your student loan servicer to send it to you. A copy of the form, as well as details on how much interest you paid, may also be in your account on your servicer's website.
Are student loan payments deductible?
When you repay student loans, you pay down the original balance and the interest that has accrued on that balance. You can deduct that interest on your taxes, but the entire student loan payment amount is not tax-deductible.
For example, say you have a $29,000 student loan with an interest rate of 5%. At the start of the standard 10-year repayment plan, you'd pay roughly $308 each month with about $121 of that payment going toward student loan interest.
Over your first year in repayment, you'd repay $3,691 overall: $2,293 in principal and $1,398 in interest. If you qualified for the student loan interest deduction, you could reduce your taxable income by the portion that went toward interest.
This includes not just newly accrued interest — like that $1,398 — but also any money that pays off interest that was capitalized, or added to your balance, when you entered repayment.
Additional education tax breaks
If you're still in school or paying for education expenses, the government offers additional education tax credits and deductions. You can claim the American opportunity credit or the lifetime learning credit, or opt for the tuition and fees deduction if you don't qualify for a credit.
You can claim these benefits even if you paid for expenses with student loans. Your income and other factors can help you determine which will save you the most. As with the student loan interest deduction, you must file your taxes jointly if you're married to be eligible for these tax breaks.
Should you refinance your student loans?
Refinancing student loans can reduce the amount of interest you pay. If you have private loans, use the calculator below to estimate your potential savings. Don't refinance federal student loans while payments and interest are paused.