Millions of Americans are burdened with student loan debt. And while there are many ways to reduce the amount of interest that accrues on your loans, there is one deduction that you may not have considered – the interest deduction.
What is a student loan?
A student loan is a loan taken out to finance higher education. The U.S. government provides the majority of student loans, but private lenders also lend money to students. Student loans are often considered an important part of the financing process for higher education.
There are a few things to keep in mind when it comes to student loan interest. First, you can only deduct interest paid on federal student loans beginning in tax year 2018. Second, you can only deduct interest paid on subsidized Stafford loans (not Perkins loans) if you itemize your deductions on your taxes. Third, you can only deduct interest paid on unsubsidized Stafford loans if you are not filing a joint return with your spouse. Finally, you cannot deduct interest paid on Grad PLUS or Consolidation Loans.
Types of student loans
When you borrow money to attend college, there are a number of different types of loans to choose from. Each has its own set of benefits and drawbacks.
Here is a rundown of the three main types of student loans:
1) Federal student loans: This type of loan falls under the jurisdiction of the U.S. government. You can qualify for a federal student loan if you are enrolled at least half-time in an accredited college or university, have a valid Social Security number, and meet certain financial requirements.
2) Private student loans: This type of loan is issued by private lending companies and generally has higher interest rates than federal student loans. However, private student loans are not subject to government regulations, so they may have more flexible terms and conditions.
3) Consolidation loans: If you have multiple student loans, consolidation loans can help you pay off your debts more quickly by combining your various loans into one large loan. Consolidation loans usually have lower interest rates than individual student loans, but they come with risks such as high monthly payments and poor credit history.
There are pros and cons to each type of student loan, so it’s important to research which option
How student loan interest is calculated
Student loan interest is calculated using a percentage of the unpaid principal balance. The interest rate on your student loans will be listed in the promissory note you received from the lender.
To calculate how much student loan interest you can deduct, locate the unpaid principal balance on your loans and divide that amount by the total remaining principal balance of your loans. The interest portion of that deduction would be based on this percentage.
For example, if you owe $10,000 on a student loan with a remaining principal balance of $5,000, your percentage-based interest deduction would be 10%. That means you would be able to claim $100 in interest deductions on that $10,000 debt.
Interest deductions are only available if you have paid at least one full month’s worth of interest on your student loans each year during the period you have had the loans. If you have not paid at least one full month’s worth of interest during any year, then no interest deductions are allowed.
How to claim student loan interest on your taxes
If you are an undergraduate or graduate student, you may be able to deduct interest paid on your student loans. There are a few things to keep in mind when claiming this deduction.
First, you have to be enrolled as a full-time student during the year that you incurred the interest. This means that if you’re a part-time student, you won’t be able to claim the interest deduction.
Second, the interest that you deduct must have been paid on loans taken out prior to January 1, 2007. If you borrowed money after 2007, the interest that you pay will not qualify for a tax deduction.
Finally, if your adjusted gross income (AGI) is more than $65,000 ($135,000 for married couples filing jointly), the interest deduction will be reduced by 2/3 of the amount of your student loan debt. So if you owe $10,000 in student loan interest and your AGI is $80,000, then you would only be able to deduct $6,000 ($10,000 ÷ 3).
The Deduction for Student Loan Interest
If you are a student and have student loan interest, you may be able to deduct that interest on your taxes. There are specific limits on how much of your interest you can deduct, but it is generally a pretty sizable deduction.
There are several factors that go into calculating how much of your interest you can deduct: the type of loan, the amount of the loan, and the years over which the interest was paid. Here’s a quick overview of what each factor means:
• Loan type: You can deduct interest on federal Stafford loans (including subsidized and unsubsidized loans), private loans from banks and other lenders, and most private loan types offered by bonds or investment companies.
• Amount of the loan: The amount you can deduct gradually diminishes as your debt increases. The maximum amount you can deduct in 2018 is $2,500 per year on all types of student loans except STAAR eligible Perkins loans, which have an unlimited amount you can deduct in 2018 and 2019 only. In 2020 and subsequent years, the limit is $3,000 per year.
• Years over which the interest was paid: The more years over which the interest was paid, the more of it you can generally deduct
How Much Can You Deduct?
Student loan interest is a tax deductible expense. You are allowed to deduct the interest you paid on your student loans in the year you paid it. There are some limitations, however, on how much of your interest you can deduct.
First, you must have incurred interest on your student loans during the tax year. This means that if you only borrowed money to cover tuition and did not take out a loan to cover living expenses, you will not be able to deduct any interest. Second, you cannot deduct more than $2,500 of interest in any tax year. Finally, you cannot deduct more than $2,000 of interest on loans taken out before 2013.
There are other ways that you can reduce your taxes as well. For example, if you retire after paying off your student loans, you may be able to claim a deduction for the remaining balance of the loan. Additionally, if your income is below a certain level, you may be able to receive a refundable credit for your student loan debt.
The Time Limit for Claiming the Deduction
There is a limit on the amount of interest that you can deduct from your student loan interest paid. The limit is 2% of your adjusted gross income. This means that if your AGI is $45,000, you can only deduct $1,200 in interest paid on your student loans.
If you are married filing jointly, the limit is even larger: it is 3% of your AGI. So if your AGI is $60,000, you can only deduct $2,400 in interest paid on your student loans.
If you are filing separately, the limit is still $2,400.
Other Limitations on the Student Loan Interest Deduction
While the student loan interest deduction is certainly an advantageous benefit, it’s not the only one you may be eligible for. Here are a few additional things to keep in mind:
You can’t deduct interest paid on private student loans.
You can’t deduct interest paid on federal student loans you took out after October 1, 2007.
You can only deduct interest paid on federal student loans that were used to pay tuition, fees, and other allowable expenses related to attending school.
There are other limitations as well, so be sure to read the full documentation on the student loan interest deduction if you’re thinking of taking it advantage of.
If you are in the process of paying back your student loans, it’s important to keep in mind that you can deduct interest paid on your loans. This deduction is based on how much money you borrowed and the length of time for which you have been paying back those loans. Keep in mind that this deduction is only available if the loan was obtained through a qualified educational institution. Additionally, this deduction cannot be taken for more than $2,500 per year. Make sure to consult with a tax professional to understand all of your options when it comes to student loan interest deductions.