How Does Student Loan Interest Deduction Work?
Learn how the student loan interest deduction works, including eligibility, limits, and income phaseouts, to help reduce your taxable income.
Student loan interest deduction helps borrowers reduce taxable income, offering financial relief. This tax benefit allows eligible individuals to deduct a portion of the interest paid on qualified student loans, lowering their overall tax burden.
Understanding how this deduction works is essential for anyone repaying student loans, as it can lead to tax savings each year.
Requirements for Qualifying Loan Interest
To qualify for the deduction, the loan must be used solely for education expenses, including tuition, fees, books, supplies, and necessary equipment. Room and board qualify if the student is enrolled at least half-time. Loans from family members or employer-sponsored plans are not eligible.
The student must have attended an eligible institution, such as an accredited college, university, or vocational school participating in federal student aid programs. If the school is not recognized by the U.S. Department of Education, the loan interest is not deductible.
Only the person legally obligated to repay the loan can claim the deduction. If a parent makes payments on a child’s student loan but is not the borrower, they cannot deduct the interest. However, if the student is the borrower and a parent makes payments on their behalf, the IRS treats it as if the student made the payments, allowing them to claim the deduction.
Annual Deduction Limit
The maximum student loan interest deduction for 2024 is $2,500. This is an above-the-line deduction, meaning it reduces taxable income without requiring itemization. Taxpayers can claim it even if they take the standard deduction.
If a borrower pays more than $2,500 in interest, only that amount is deductible. The limit applies per tax return, not per loan, so having multiple student loans does not increase the deduction.
Taxpayers who are married and file separately are not eligible. Only those filing as single, head of household, qualifying widow(er), or married filing jointly can claim it.
Income Phaseouts
The deduction phases out at higher income levels. In 2024, single filers with a modified adjusted gross income (MAGI) above $75,000 see a reduced deduction, with eligibility ending at $90,000. For married couples filing jointly, the phaseout starts at $155,000 and ends at $185,000. These thresholds adjust annually for inflation.
MAGI is calculated by taking adjusted gross income (AGI) and adding back certain deductions, such as foreign earned income exclusions or tax-free interest from U.S. savings bonds used for education. Many taxpayers’ MAGI will be the same as their AGI, but those with additional adjustments should verify their calculation.
Taxpayers within the phaseout range receive a prorated deduction. For example, a single filer with a MAGI of $82,500—halfway through the phaseout range—would be eligible to deduct only 50% of the maximum amount. Once income exceeds the upper limit, no deduction is available.
Procedures for Claiming the Deduction
To claim the deduction, taxpayers must report the interest paid on their federal income tax return. Lenders typically provide Form 1098-E, the Student Loan Interest Statement, if at least $600 in interest was paid during the tax year. If total payments were below this threshold and no form was issued, borrowers can still deduct the interest by referencing their loan statements or payment records.
The deduction is entered on Schedule 1 of Form 1040, which adjusts income before calculating taxable earnings. Since this is an adjustment to income rather than a tax credit, it reduces taxable income rather than directly lowering tax liability. Taxpayers using tax preparation software or working with a professional should ensure the correct figures are reported to avoid errors.
Documentation and Recordkeeping
Accurate records are essential for claiming the deduction and verifying amounts if questioned by the IRS. Taxpayers should retain loan agreements, payment records, and lender-issued statements.
Lenders must issue Form 1098-E if a borrower pays $600 or more in interest during the tax year. If this form is not received, taxpayers can still claim the deduction using their loan statements or online payment histories. Keeping these records for at least three years after filing a return is advisable, as this is the standard period for IRS audits. If an amended return is filed or an audit occurs, organized documentation can prevent delays or disputes.