Student Loan Tax Deduction: What You Need to Know
If you're currently repaying student loans, you've probably received a 1098-E form in time to file taxes (also called a Student Loan Interest Statement), but did you know that you may qualify for a student loan tax deduction based on loan interest you paid in the last year? The IRS offers several tax credits and loan interest deductions in order to provide some financial relief to students, so even if you wouldn't typically file a tax return due to your income level, you should consider doing so. By claiming a student loan deduction, you could reduce your amount of taxable income, which can result in a higher tax return. The money you get back from your deduction could be put toward future educational costs or additional loan interest payments.1
Below we've put together a quick guide on the types of credits and deductions available, as well as information to help you identify which options you qualify for and how to file.
Student Loan Interest Deduction
The most basic student loan tax deduction is based on loan interest paid over the course of the year. You can calculate the potential tax savings based on your current loan rates and amounts by using a tax-deductible loan calculator.
How Does It Work?
You can claim the amount of student loan interest you paid as a deduction—meaning you subtract that amount from your total taxable income. This deduction can apply to up to $2,500 of interest paid on any loan that was used to pay higher education expenses—not just federal student loans. This includes both voluntary and required payments, and you can claim this deduction for as long as you're repaying your loans.1,2
To qualify for this deduction, your modified adjusted gross income (MAGI) must be less than $80,000 ($160,000 if filing a joint return). Modified adjusted gross income should be calculated before factoring in your deduction. Additionally, interest paid on loans you took out for a spouse or dependent also qualifies (though the $2,500 maximum deduction applies cumulatively to all loans combined).2
(For more information on what loans qualify, who is considered an eligible dependent and what counts as deductible interest, refer to IRS Publication 970.)
American Opportunity Credit
This is a tax credit that allows you to claim up to $2,500 per year (per qualifying student) for the first four years of college.1,3
Is a Tax Credit the Same as a Deduction?
No—a credit reduces the amount of income tax you eventually are required to pay once your taxes have been filed. This is different from a deduction, which reduces the amount of income you are required to pay taxes on. If the credit amount exceeds the amount you are required to pay in taxes, up to 40% of the credit may be refunded to you.3
You can claim the American Opportunity Credit for yourself, a spouse, and any qualifying dependents. In order to be eligible, each student must be currently enrolled at least part-time in a degree-granting program, and must not have claimed this credit in more than 3 past tax years. If you have claimed another education tax credit this year—such as the Lifetime Learning Credit—you can't claim the American Opportunity Credit.
Additionally, your modified adjusted gross income (MAGI) must be less than $90,000 ($180,000 if filing a joint return) to qualify.3
(Click here for additional information on this from the IRS.)
Lifetime Learning Credit
This is a tax credit (not a deduction) that allows you to claim up to $2,000 per year (total for all qualifying students) for college costs—this includes tuition, fees, and course materials. There is no limit to the number of years you can claim this credit. If the amount of the credit exceeds the taxes you are required to pay, you will not be refunded the excess amount.1,4
You can claim the Lifetime Learning Credit for yourself, a spouse, and any qualifying dependents. This credit is not limited to degree-granting programs—all postsecondary education and job-skill courses qualify. If you have claimed another education tax credit this year—such as the American Opportunity Credit—you can't claim the Lifetime Learning Credit.
Additionally, your modified adjusted gross income (MAGI) must be less than $65,000 ($130,000 if filing a joint return) to qualify.4
(Click here for additional information.)
Interested in learning more about how to pay for college? Explore financial aid options at AIU.
1. Federal Student Aid, "Tax Benefits," on the Internet at https://studentaid.ed.gov/sa/types/tax-benefits (visited on March 1, 2016).
2. Internal Revenue Service, Publication 970, "Chapter 4: Student Loan Interest Deduction," on the Internet at https://www.irs.gov/publications/p970/ch04.html (visited on March 1, 2016).
3. Internal Revenue Service, Publication 970, "Chapter 2: American Opportunity Credit," on the Internet at https://www.irs.gov/publications/p970/ch02.html (visited on March 1, 2016).
4. Internal Revenue Service, Publication 970, "Chapter 3: Lifetime Learning Credit," on the Internet at https://www.irs.gov/publications/p970/ch03.html (visited on March 1, 2016).