Written By Kevin Payne
As the old saying goes, “nothing is certain except death and taxes.” Millions of Americans, though, might be entitled to a generous tax deduction on the interest paid on your student loans. The tax deduction applies to federal and private student loans, including refinanced student loans. Not everyone will qualify, though.
Keep reading to learn whether refinanced student loans are still tax-deductible, the difference between tax deductions and credits, and scenarios where you wouldn’t qualify for this helpful tax credit.
What is a tax deduction?
A tax deduction is a personal expense that the federal government allows you to deduct from your taxable income each year. Deducting expenses reduces the amount of income that’s subject to federal income tax.
Tax deductions take many forms. You can choose to take a standard deduction if you don’t want to itemize your deductible expenses. The federal government sets a standard deduction amount annually. For the 2020 tax year, the standard deductions are:
- $12,400 for single taxpayers and married taxpayers, filing separately
- $24,800 for married couples, filing jointly
- $18,650 for single taxpayers with dependents (also known as the head of the household)
You can also choose to itemize your tax deductions, which, depending on your circumstances, could allow you to claim more expenses and save money in taxes. Itemized deductions are broken down into categories with set limits on how much you can claim. A few of the more common deductions that are itemized include:
- Medical and dental expenses
- Property taxes
- Interest charges paid
- Charitable gifts
To claim itemized deductions, taxpayers must file their taxes using Form 1040 and then list itemized deductions on Schedule A.
Tax deduction vs. tax credit
Tax deductions are often confused with tax credits, but they’re not the same. Tax deductions are subtracted from your income before calculating how much you owe in taxes. Tax credits are subtracted from the amount of tax you owe.
There are two types of tax credits — refundable and non-refundable. Refundable tax credits mean you’ll get a refund even if it’s more than what you owe. A non-refundable tax credit means you’ll only get a refund up to the amount that you owe.
Both tax deductions and tax credits have the potential to save you money on taxes.
Are refinanced student loans still tax deductible?
If you pay interest on your student loan, there’s a chance you can take advantage of a student loan interest deduction. This applies to federal and most private student loans. Refinanced student loans are considered private student loans in most cases.
If qualified, you may be able to deduct up to $2,500 in student loan interest each year. The amount includes required interest payments as well as voluntary prepaid interest payments.
The most important factor in determining if you qualify for this tax deduction is your income. The federal government has set limits on how much you can make to claim a student loan interest deduction. Whether you qualify depends on your modified adjusted gross income (MAGI).
Your MAGI is calculated by taking your adjusted gross income (AGI) and adding back certain deductions. There are two income limits set by the federal government concerning student loan interest deductions. If your income is above the first limit but below the second limit, you’ll receive a reduced deduction.
For example, a single individual with a MAGI between $70,000 and $85,000 would receive a reduced deduction based on their income level. If your MAGI is above the second limit, you’re no longer eligible for a tax deduction. The table below shows the 2020 MAGI limits for student loan interest deductions.
Modified Adjusted Gross Income (MAGI) Limits for Student Loan Tax Deductions
Tax Status | Gradually Reduced Reduction | No Deduction |
Single, head of household, and qualifying widowers | $70,000 | $85,000 |
Married, filing jointly | $140,000 | $170,000 |
Married, filing separately | N/A | N/A |
Note that you’re ineligible to claim student loan interest deductions if your tax filing status is married, filing separately. You’re also ineligible if you are claimed as a dependent on someone else’s tax return. Taxpayers can claim this deduction without having to itemize their deductions.
When you might not qualify for a student loan tax deduction
See IRS Publication 970, Tax Benefits for Education, for all of the qualifications regarding deducting student loan interest payments. Although many individuals qualify for this tax deduction, there are some scenarios where you might not be eligible for it.
People who qualify to refinance student loans tend to earn higher incomes because of underwriting requirements set forth by private lenders. Although this isn’t always the case, there’s a good chance that you make too much to qualify for a student loan interest deduction.
Another scenario where you wouldn't qualify for a student loan tax deduction is if your refinanced student loan is structured as a personal loan. This isn’t very common, but it does exist.
An example of this is First Republic Bank, which offers a personal line of credit to refinance student loans. Because of its classification, individuals who open a line of credit to refinance wouldn’t qualify for a tax deduction. Although it’s uncommon, it’s always a good idea to verify with your lender about the structure of your student loan.
Related: First Republic Bank Student Loan Refinancing Review
Check with your loan servicer and read the terms and conditions to determine if you refinance your student loan, it might qualify for a tax deduction. Regardless of your situation, we recommend consulting with a tax professional concerning your tax situation, especially if it's particularly complex. Tax laws are complex and can change from year to year.
Refinanced student loan tax FAQs
No, student loans don’t count as taxable income. The only time they’d be considered taxable income is if you had your student loans forgiven through income-driven repayment forgiveness.
Qualified taxpayers can deduct up to $2,500 in student loan interest payments annually. The deduction applies to eligible federal, private and refinanced student loans.
You don’t need to report your student loans as income on your tax return unless your loan was forgiven through income-driven repayment forgiveness. You might be able to deduct student loan interest payments from your taxable income if you qualify.
The Department of Education has suspended the garnishment of wages and the offset of tax refunds for individuals with defaulted federal student loans. The suspension lasts through August 29, 2023.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
