Paying interest on your private student loans throughout the year is no fun, but fortunately, when tax time comes, you might be able to get a benefit from all that interest paid through the student loan interest deduction.
An estimated 12 million people take advantage of this benefit, with annual deductions approaching $14 billion. This is especially important for those who’ve made payments on private student loans or non-Direct federal loans that aren’t eligible for interest-free COVID forbearance. Although, if you have Direct Loans and paid off accrued interest during the COVID payment pause, that qualifies for the deduction as well.
Here’s what you need to know about whether your private student loan interest is deductible and how to claim it.
What’s the student loan interest deduction?
As a borrower with either federal or private student loans, you can deduct the student loan interest (not the principal) paid each year, up to a maximum of $2,500. This applies only when the loan is in your name or you’re a cosigner. Your federal or private loan servicer will send you a tax form 1098-E after the end of each year to tell you how much interest you’ve paid.
It only sends this form if you’ve paid more than $600 in interest for the year. You can still claim the deduction if you paid less than that amount, but you’ll need to use your servicer or lender’s online portal to manually figure out how much interest you paid.
The student loan interest deduction is an “above-the-line” deduction meaning it comes before you choose whether to take the standard deduction or to itemize your tax return. You can claim the interest deduction and take the standard deduction — $12,950 per person in 2022 — on top of it!
All you need to do to claim the deduction is input your loan interest paid on Schedule 1 of your Form 1040, the main page of your taxes. There are no additional tax forms to fill out.
Who’s eligible for the student loan interest deduction?
There are two main limitations when taking the interest deduction: income and tax filing status.
First, the IRS imposes income limits to deduct your student loan interest. These limits are based on your modified adjusted gross income (MAGI).
For the tax year 2022, only borrowers whose MAGI is lower than $70,000 for the year ($140,000 if married, filing jointly) qualify to take the student loan interest deduction. If your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if married, filing jointly), you qualify for less than the $2,500 maximum deduction. Once your income is above those thresholds, you’re no longer able to take the deduction.
Modified adjusted gross income
It’s important to note that MAGI isn’t the same as adjusted gross income (AGI). To calculate your MAGI, start with your AGI but add back a few deductions. Most notably:
- Half of any self-employment tax you paid
- The foreign earned income exclusion
- Student loan interest
- Passive income losses
That makes it a little more difficult to qualify for the student loan interest deduction if you’re self-employed or working overseas, as your MAGI might be quite a bit higher than your AGI.
If you’re self-employed, you pay a self-employment tax of roughly 15% of your income. This covers the part of Medicare and Social Security taxes that an employer would have covered if you worked a W-2 job.
With half of this amount added back to your calculation, your MAGI might be about 7.5% higher than your AGI and might be over the limit to claim the deduction.
You can counteract this as much as possible by contributing enough money to tax-deferred workplace retirement plans through your business, such as a traditional 401(k) or SIMPLE IRA. Contributions to these accounts lower your MAGI each year and could bring it below the limit for the student loan interest deduction.
If you work overseas in a country with a tax agreement with the US, and you earn less than $112,000 USD ($224,000 if married, filing jointly), you don’t need to worry about the interest deduction as you likely have little to no tax burden in the US anyway.
What’s more, you can also have extremely low federal student loan payments. Earning more than that amount means you probably won’t qualify for the student loan interest deduction.
Married tax filing status
The second limitation is tax filing status when married, particularly if you also have federal loans. If you file taxes jointly with your spouse, you’re subject to the MAGI income limits. However, if you and your spouse file as “married, filing separately” — which can come up when excluding your spouse’s income and lowering IDR payments on your federal loans — you won’t be able to claim the student loan interest deduction.
You’ll want to factor this in when you calculate whether filing taxes separately is a net benefit for you or not. At the 24% tax bracket, assuming you’ve paid at least $2,500 for the year in student loan interest, the interest deduction would lower your tax bill by about $600. That means you need to save at least $50 per month on your IDR payments by filing taxes separately, or it may not be worth it.
Need help with your loans or your taxes?
Everyone’s situation is different. If your situation is more nuanced, schedule a consultation with a Student Loan Planner® advisor to get expert help creating a plan to eliminate your loans.
Student loans and taxes are complex and affect each other in different ways. The specialists at Student Loan Tax Experts are familiar with both of these areas. They’ll help you figure out the best strategy for your situation and then prepare your tax forms on your behalf. Mention that Student Loan Planner® referred you, and you can score a discount.