How to know if you qualify for a student loan tax deduction

Most student loan borrowers can get a tax break on the interest they pay. (iStock)

Student loans can be a significant financial burden but come tax time, you can get a little money back in the form of a deduction from your gross income.

The student loan tax deduction allows eligible borrowers to deduct the interest they paid on student loans throughout the year, up to a maximum of $2,500. Depending on your tax bracket and how much you paid in interest, the deduction could save you hundreds of dollars.

If you have private student loans and want to save more on your payments, visit Credible to see if you can lower your interest rate.

FIXED-RATE STUDENT LOAN REFINANCING RATES HOVER NEAR RECORD LOW

Am I qualified for a student loan tax deduction?

Like most tax breaks, the student loan tax deduction isn't available for everybody, including some borrowers who are making student loan payments.

To qualify for the deduction, you need to meet the following eligibility requirements:

• You paid interest on a qualified student loan during the tax year.
• You’re legally obligated to pay interest on the loan.
• You aren’t married and filing separately from your spouse.
• Neither you nor your spouse (if you’re filing jointly) can be claimed as a dependent on someone else’s tax return.
• Your modified adjusted gross income (MAGI) is less than a certain amount, which is determined each year—for the 2020 tax year, it’s $85,000 if you’re filing on your own or $170,000 if you’re married filing jointly. The value of the deduction starts to phase out if you make $70,000 or $140,000, respectively.

Also, the loan itself must meet the following criteria:

• It was taken out to pay qualified higher education expenses for you, your spouse or a person who was your dependent when you borrowed the money.
• The expenses were incurred for education provided during an academic period for an eligible student.
• The expenses were paid or incurred within a reasonable period of time before or after you took out the loan.

Keep in mind that you can get the student loan tax deduction even if you refinanced your original loans, which can also save you money. Use an online tool like Credible to compare rates from multiple lenders at once to find out how much you can save on your private student loans.

BIDEN COULD CANCEL STUDENT LOAN DEBT: SHOULD YOU STILL PAY NOW?

How to claim the student loan tax deduction

At the beginning of tax season, you should receive Form 1098-E from your student loan servicer or lender. This document shows how much student loan interest you paid during the previous year.

As you begin your tax planning, you'll include that amount when figuring your adjusted gross income, which you'll find on Schedule 1 of your tax return. If you're filing with an online tax preparation service, simply share how much interest you paid when it prompts you.

If you're not sure whether you qualify, you can use a tool from the Internal Revenue Service to find out.

3 WAYS TO REDUCE YOUR STUDENT LOAN DEBT

Other options if you're not qualified for a student loan tax deduction

Not everyone qualifies for the student loan interest deduction. But even if you do, it's a good idea to look for other ways to save money on your student loans as you pay them down.

Refinancing is one of the best ways to save money because it can allow you to get a lower interest rate on your student loan debt. You can compare student loan refinancing rates without affecting your credit score through an online marketplace like Credible.

Other options include:

• Checking to see if you qualify for a student loan forgiveness or loan repayment assistance program.
• Making extra payments on your loans every month.
• Setting up automatic student loan payments—many lenders offer interest rate discounts for autopay.

Take some time to research all of your options, including using a student loan refinancing calculator to find out how much you can save.

HOW HAS THE BIDEN ADMINISTRATION HELPED STUDENT LOAN BORROWERS?

The bottom line

The student loan interest deduction doesn't get rid of your obligation to pay student loans, but it can provide some relief, especially if your balance is high.

As you start your tax preparation, make sure you've received the documentation you need to request the deduction. If you haven't received the 1098-E form from your student loan servicer or lender, you can typically download a copy through your online account.

While you're looking for other ways to save on your private student loans, consider using Credible to get prequalified for student loan refinancing and to compare your options to find the best deal.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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