Student Loan Tax Deduction Simplified


Section 221 of Internal Revenue Code deals with tax deduction on student loan interest to a taxpayer if certain conditions set therein are satisfied. If you made federal student loan payments in 2018, you may be eligible to deduct a portion of the interest paid on your 2018 federal tax return. This is known as a student loan interest deduction. Please note tax deduction is not same as tax credit.  The present post is an attempt to answer five most important questions associated with the student loan interest deduction under 26 US Code.

1. What type of loan interest you can deduct ?

Not all kinds of loan will qualify for the educational loan on which interest is deductible. The loan must be a qualified student loan for the benefit of you, your spouse, or your dependent. Loans from a qualified employer plan don’t count, nor do private loans from family or friends The common question, therefore, is “what type of educational loans for students are qualified for tax deduction ?” . The answer is that loan has to be what is called “qualified student loan”which is a loan you took out solely to pay qualified higher-education expenses that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan;
  • For education provided during an academic period for an eligible student; and
  • Paid or incurred within a reasonable period of time before or after you took out the loan.

2. Who is an eligible student?

Section 25A(b)(3). of 26 US Code defines Eligible Student. The meaning of eligible student is borrowed from section 484(a)(1) of the Higher Education Act of 1965. In simpler terms, in my understanding,

  • An eligible student is one who is enrolled or accepted for enrollment in a degree, certificate, or other program leading to a recognized educational credential at an institution of higher education that is an eligible institution ; and
  • is carrying at least ½ the normal full-time work load for the course of study the student is pursuing.

3. What are the basic conditions to claim the student loan tax deduction?

You can claim a deduction of interest paid on an educational loan if all of the following conditions are satisfied

  1. You paid the interest on a qualified student loan ;
  2. You’re legally obligated to pay educational loan interest. This means that you and/or your spouse are the signatories on the educational loan if you file a joint return. If your child takes out the loan in his own name and is legally obliged to pay the loan, you can’t claim the interest deduction even if it is you who make the payments for him.  
  3. You must use the single, head of household, qualifying widow(er), or married filing jointly filing status to claim it. You can’t claim the student loan interest deduction if you file a separate married return.
  4. Your Modified Adjusted Gross Income (MAGI ) is below or equal to the maximum allowed to be deducted annually; and
  5. You or your spouse, if filing jointly, are not claimed as dependents on someone else’s return.

4. What expenses you must have paid with the student loan

Following expense are eligible for the use of student loan .

  • Tuition and fees including costs for rental or purchase of any equipment, materials
  • Cost of books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer
  • costs as determined by the institution for room and board costs incurred by the student .

5. How to figure out the tax deduction for education loan ?

Form 1098e is the student loan tax deduction form that is crucial for your claim of interest deduction. You will receive the Student Loan Interest Statement or  Form 1098-E sometime after the first of the year from your educational loan lender only if you paid $600 or more in interest to a federal loan servicer during the tax year . If your payment was less than $600 in interest to your federal loan servicer, you can contact each servicer as necessary to find out the exact amount of interest you paid during the year. Box 1 of this form will show the interest paid by you during the year under consideration. Use this data for working out the worksheet found in Publication 970 to calculate the deductible portion of your student loan interest.  

Use this educational loan interest deduction calculator for knowing how many deductions you can claim for interest on an educational loan.

6. How much deduction Student Loan Interest Deduction Phase-Outs

The maximum student loan interest deduction is fixed at $2500 or the amount if interest paid by you during the tax year whichever is less. However, there’s also a deduction phaseout that can limit the maximum deduction you can claim if your earnings fall within a specified range the aforesaid amount The phaseout for student loan interest ranges for the 2018 tax year are as under :

Filing StatusPhase-out Begins Phase-out Ends
Married Filing Jointly135,000165,000
Qualifying Widow(er)65,00080,000
Head of Household65,00080,000

Your limit is prorated if your MAGI falls within the phase-out range. The IRS explains how to calculate the reduced student loan interest deduction in Chapter 4 of Publication 970:

“If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. To figure the phase-out, multiply your interest deduction (before the phase-out, but not more than $2,500) by a fraction. The numerator is your MAGI minus $65,000 ($130,000 in the case of a joint return). The denominator is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phase-out) to give you the amount you can deduct.” 

7.How to claim the educational loan interest deduction in your tax return?

You need to fill the deduction in point 33 under Adjustment to Income in the Schedule 1 of the one-page tax form 1040 .

Hope the aforesaid answer clarifies most of your doubts on the legality of Student Loan Tax Deduction

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