Are Student Loans Tax Deductible?

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Flickr user Nic McPhee

It’s one of many questions that parents and students have on their mind—are student loans tax deductible?

The answer is yes you can, under certain circumstances.

Parents can claim a deduction of income of up to $2,500 if they are repaying interest on student loans on either their own or their children’s behalf. This means you will not be paying tax on the amount of $2,500. This includes the required payments plus the voluntary interest that you pay. So, basically, the greater the amount you pay, the greater the deduction.

The Restrictions:

As with everything else, this provision comes with its own set of restrictions. If your modified adjusted gross income is less than $65,000, you are eligible for the full deduction of $2,500. However, the deduction reduces progressively for modified adjusted gross incomes above $65,000 up to $80,000. There is zero deduction modified adjusted gross incomes above $80,000.

What Does This Translate To?

This means that the tax benefits are highest if your gross income is less than $65,000 and you fall in the 25% income tax bracket. In this case, you will be able to save $625.

The higher your income, the lower your savings. It could dwindle down to zero savings depending on your annual income. When you consider the larger picture, the tax benefit is not as big as it appears at first glance.

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