While most interest paid toward personal debt is not deductible, the government has made an exception for student loan interest. The deduction can lower your taxable income by thousands, depending on your situation.
One of the most common misconceptions about student loan interest deduction is that a parent can claim for helping make payments on their child’s loan. That is not the case. A parent can only deduct if they are personally liable for that loan. This means that Stafford, Perkins and PLUS Graduate loans will not be deductible to be a parent because the student is the borrower.
Overview of the Student Loan Interest Deduction
The Student Loan interest deduction allows a person to deduct any actually paid, not only collected, interest on a student loan during the calendar year, as long as certain conditions are met. The maximum deduction is $ 2500 and is subject to income restrictions.
This deduction is actually an “above the line” adjustment, which means that you don’t need to itemize your other deductions to get it. In other words, you can take the standard deduction and you still deduct your student loan interest.
The actual reduction requires the use of a more complex formula, but the starting point is simple. Essentially, you can only deduct the portion of each loan payment that represents the interest. You can also deduct any fees that you pay up front to receive the loan, such as fees for initiating, over the term of the loan.
Certain types of loans do not qualify for the Student Loan interest deduction. This would include a loan taken from a qualified plan like a 401K or 403b and loans between related parties. For example, if your grandparent gave you a personal loan for your education expenses, the interest on the loan would not be tax deductible.
All of the following should apply to the loan before the interest is considered deductible:
- Your submission status will not be Married Filing separately.
- No one else can claim you as an exemption from his or her tax return.
- You are legally obliged to pay the interest on the student loan.
- You actually pay the interest. Accumulation of interest on your balance itself is not deductible.
Furthermore, the money received for the loan must only be used for tuition, room, council, books, or fees to be deductible.
The Student Loan interest deduction is limited (or “phased-out”) for taxpayers with certain levels of Modified Gross Income (MAGI).
For taxpayers, Single, head of household, or Widow (re) status claim for the 2018 tax year:
- $ 64,999 (MAGI) or less – The full deduction is allowed.
- $ 65,000 – 79,999 (MAGI) – A partial deduction is permitted.
- $ 80,000 (MAGI) or more – no deduction is allowed.
For taxpayers claiming Married Filing Joint status for the 2018 tax year:
- $ 129,999 (MAGI) or less – The full deduction is allowed.
- $ 130,000 – $ 159,999 (MAGI) – A partial deduction is allowed.
- $ 160,000 or more – No deduction is allowed.
Coordination with other tax benefits
The Student Loan interest deduction can be taken in the same year as the Hope Scholarship and Lifetime Learning Tax Credits. There is a “double submerge” rule, however, that prohibits deduction of interest twice if it qualifies for a separate type of deduction.