Student loan statistics make for some scary reading. According to the latest numbers, the United States’ total student loan debt is in excess of $1.56 trillion, with over 44.7 million Americans currently having student loan debt and average monthly payments of $393. Many graduates therefore seek out different ways to pay off their student loans quickly and efficiently, as well as other tools that can help with their finances like student loan interest deduction.
What is the Student Loan Interest Deduction?
In simple terms, the student loan interest deduction is a type of tax deduction. It works just like many other forms of tax deduction, but with certain specific rules and requirements. Essentially, to calculate your student interest deduction, you work out the total amount paid in student loan interest for a tax year and then take that amount away from your taxable income.
If you meet the eligibility requirements for this deduction, you can reduce your taxable income by a maximum of $2,500. As an example, let’s say you make $45,000 per year. The student loan interest tax deduction can reduce your taxable income down to $42,500, resulting in lower tax payments for you.
Keep in mind that tax deduction decreases your taxable income. So, you don’t have to itemize to get the standard deduction. And getting this deduction is a good argument for consumer debt, such as people paying down credit cards, because this tax benefit lowers interest rate on your student loans. Also, with the standard deduction, you can claim the tax break on student loan interest payments.
How Much Can You Save With the Student Loan Interest Deduction?
The student loan interest deduction 2019 cap is set at $2,500, so this is the maximum amount you can get in deduction. In terms of actual savings on your tax bill, the maximum you can currently get, according to Forbes, is $625.
The amount you’ll actually save depends on your current tax rate, your income, and the amount of student loan interest you’re able to deduct. Not everyone will be able to get the maximum amount and claim the full $2,500 deduction.
Eligibility Requirements for The Student Loan Interest Deduction
If you want to benefit from the student loan interest tax deduction, you’ll need to meet a set of strict requirements.
- Income – In the past, the maximum deduction could only be obtained by those earning up to $65,000, with those earning up to $80,000 getting a discounted deduction, and anyone over $80,000 not being eligible for the deduction at all. However, the student loan interest deduction 2019 requirements have been upgraded: now, you can earn up to $70,000 and still get the full amount or up to $85,000 for a discounted deduction. These amounts refer to your modified adjusted gross income (MAGI).
- Loan – You need to have taken out a qualified student loan in order to apply for this tax deduction. The loan needs to have been taken out purely to cover education expenses. In addition, the qualifying loan needs to have been taken out for you, your spouse, or a dependent of yours. If you’re a parent who took out a parent student loan, then the student must have been in at least half-time higher education at the time. Of course, the loan also needs to be in your name, with a legal obligation for you to repay it.
- Interest – You need to have paid interest on the student loan during the tax year for which you’re applying for the student loan interest tax deduction.
- Filing Status – You won’t qualify for this tax deduction if you are classed as a dependent on someone else’s tax return. You also won’t qualify if you’re filing taxes under the Married Filing Separately status. You must be single, head of household, married filing jointly, or qualifying widow(er).
All About Form 1098-E
If you’re going to apply for a student loan interest deduction, you’ll be getting very familiar with Form 1098-E. This form, which is also known as the Student Loan Interest Statement, lets you know how much student loan interest you’ve paid over the course of a given year. It’s vital to file this form in order to obtain the tax deduction.
Form 1098-E will need to be filed with the rest of your taxes, and it also gives you the data you need to fill out another form: Form 1040 (your personal income tax return). You can obtain Form 1098-E from your loan servicer. Your servicer is legally obliged to provide this form as long as you paid more than $600 in interest over the course of a year. You’ll need a Individual Taxpayer Identification Number or “ITIN” to do this.
In general, you should reserve your Form 1098-E either by mail or electronically several months ahead of the April tax deadline. If you haven’t received it, check your digital account with your loan servicer as you may be able to simply download it direct from the site. If not, you’ll need to get in touch with them and make a request for it.
How to Get Student Loan Interest Deduction
Now let’s look at how you go about applying for your student loan tax credit, broken down into four simple steps:
- Form 1098-E – Once you’ve received Form 1098-E, you’ll need to review it and check that the details, like your name and address, are all correct. You should see a box showing how much student loan interest you’ve paid in the last tax year. You can then use this number later on in Step 3 to calculate your deduction.
- Eligibility – Next, you need to check through the eligibility requirements and make sure you are fully eligible for your student loan tax deduction. Even if you’ve been making lots of student loan interest payments over the year, you won’t necessarily qualify for the deduction if you don’t meet the other criteria. You’ll need to be earning under $85,000 as a single filer or less than $170,000 if you’re filing a joint tax return with your spouse, for example. Read through all the eligibility requirements and make sure you meet them all before continuing.
- Calculate The Deduction – The way you calculate your deduction will depend on how you choose to fill out your tax returns. If you use software or have an accountant, you don’t need to worry too much as your software or CPA can do the whole thing for you. If you’re calculating everything yourself, things get a little more complicated. If you earn below the minimum ($70,000 for singles and $140,000 for married couples), you should be able to claim the full $2,500 or the total amount you paid in interest. If you earn somewhere between $70,000 and $85,000 as a single of $140,000 and $170,000 as a couple, you’ll need to apply a phaseout formula to work out the right amount. You can find all the resources you need here.
- Form 1040 – On your personal income tax form, you can then enter the deduction on line 33 of the Form 1040 or Form 1040NR. If you’re filing a Form 1040NR-EZ, the deduction is entered on line 9.
Student Loan Tax Credits
As well as the student loan interest deduction, you may be eligible to apply for one of the two main forms of student loan tax credit: American Opportunity Credit and Lifetime Learning Credit. The IRS Interactive Tax Assistant helps you determine your eligibility for these forms of credit, but you can only apply for one at a time. You’ll need a Form 1098-T in order to apple, as well as Form 8863 and a tuition statement from the educational institution concerned.
- American Opportunity Credit – American Opportunity Credit can be worth up to $2,500 and can be claimed for a maximum of four tax years per student. The student needs to be in half-time education at least and must be studying towards a degree or recognized credential. This is an important tax credit for parents to consider when their children are in college.
- Lifetime Learning Credit – The Lifetime Learning Credit can be worth a maximum of $2,000 per year, per student. The eligibility requirements for this student loan tax credit are quite relaxed; there are no limits concerning the amount of study time or the number of years the credit can be claimed, but it’s only available while you, your spouse, or your dependent is actually studying.
Is the Student Loan Interest Deduction Worth It?
Overall, the student loan tax deduction can be a helpful bonus for those who want to pay less taxes and it’s worth exploring as a money saving option. However, you should always compare other options too. Paying less in taxes is always nice, but actually reducing the overall cost of your student loans can provide an even better value in the long term.
Various options exist to help you do this, including student loan forgiveness and refinancing. Companies like Future Fuel can assist with refinancing your loans, leading to a lower interest rate. In the case of Future Fuel, your rate can be reduced by up to 1.7%, resulting in much more manageable interest accumulation over time and faster debt repayments.
With student loan debt rising year on year, it’s vital for everyone to do their research, look at the many options available to them, weigh up the pros and cons, and make the best decisions. Nobody wants to be burdened with excessive debt any longer than necessary, so be sure to take action today and seek out the necessary services to enjoy healthier finances.