It sucks paying student loans. But, once a year, you’ll be (at least a tiny bit) happy you have them: When it’s time to do your taxes. Turns out, you can save money on your taxes from your student loans.
Most borrowers with student loans can, indeed claim a tax deduction for the interest they’ve paid on these loans. This type of deduction will decrease the borrower’s income and may in turn decrease the amount they owe or increase the amount of the refund they receive. This will depend on which boat the borrower is in.
How do you go about transforming your dream-crushing student loans, into a small windfall each tax season? Here’s some help on how you can save money on your taxes thanks to your student loans.
The basics of your student loan deduction
Borrowers can deduct up to $2,500 in student loan interest on their taxes. But, not everyone is eligible. Married couples can also only deduct up to $2,500 in total. Even if both parties have student loans and are paying interest, they can only deduct up to that much.
Your adjusted gross income (AGI) must be below $80,000 (or $160,000 for couples filing jointly) in order to qualify for this deduction.
Those making more than $65,000 per year (or $130,000 for couples) will see the deduction lowered, until it is eventually phased out at the $80k mark.
The student loan tax deduction works even for borrowers who do not itemize their other deductions. If you’re using software like TurboTax or TaxSlayer, it should be pretty straight forward. Software includes the deductions under a section for “Education Expenses” or “Education Credits”. (Don’t get it confused with credits received to help pay for education–these may increase your tax bill rather than decrease it.)
You can include interest paid on any of your normal/scheduled payments. Additionally, any extra payments you may have made throughout the year.
A few caveats to know
There are some restrictions based on which schools you attended and if your loans qualify for a deduction. But, “eligible educational institution” is a pretty broad label that includes pretty much any and every accredited college and university in the country.
You can only deduct interest from loans that were given by a legitimate student loan lender. You can’t, for instance, deduct interest on a loan that your employer has offered to pay for your education.
Keep in mind, it’s a tax deduction
This is a tax deduction–not a tax credit. This means that it essentially offsets up to $2,500 of your taxable income, which reduces your tax bill. A tax credit would be added on top of whatever you owed or were going to receive as your refund.
Because this is a deduction and not a credit, it’s not advisable for you to delay paying off your student loans in order to keep receiving this deduction (i.e., you won’t receive dollar-for-dollar back on what you are paying in interest). The longer you put off paying your student loans, the more interest you accrue, and the more you ultimately have to repay.