Is Student Loan Interest an Itemized Deduction or Adjustment to Income?

Student loan interest can provide tax benefits, but understanding how it affects your return is key. Rather than an itemized deduction, it is an adjustment to income, directly reducing taxable income. This distinction determines who can claim it and how much they can deduct.

Classification as an Itemized Deduction or Adjustment to Income

Student loan interest is an “above-the-line” deduction, meaning it applies regardless of whether a taxpayer itemizes or takes the standard deduction. Unlike itemized deductions, which only benefit those whose total expenses exceed the standard deduction, this adjustment is available to all eligible filers.

The deduction is capped at $2,500 per year, per tax return, regardless of the number of loans. It is also subject to income limits. In 2024, the phase-out begins at a modified adjusted gross income (MAGI) of $75,000 for single filers and $155,000 for married couples filing jointly. The deduction is eliminated at $90,000 and $185,000, respectively.

Because this deduction is taken before calculating adjusted gross income (AGI), lowering taxable income may also increase eligibility for other tax benefits, such as the Earned Income Tax Credit (EITC) or education-related credits.

Requirements to Qualify

To qualify, the loan must have been used solely for education expenses, including tuition, fees, books, supplies, and other necessary costs at an eligible institution. Loans from family members or employer-sponsored plans do not qualify. The IRS only allows deductions for interest paid on loans from legitimate lenders, such as banks, credit unions, or federal student loan programs.

The borrower must be legally obligated to repay the loan. If someone makes payments on a loan they are not responsible for, they cannot claim the deduction. For example, if a student loan is in the student’s name, only the student can claim the deduction, even if a parent is making the payments. However, if the loan is a Parent PLUS Loan, the parent borrower is eligible to deduct the interest.

Filing status also affects eligibility. Married couples must file jointly to claim the deduction, as those filing separately are ineligible. Taxpayers claimed as dependents on someone else’s return cannot claim the deduction, even if they are the ones making the loan payments.

Tax Forms and Documentation

To claim the deduction, taxpayers must report the amount on IRS Form 1040, specifically on Schedule 1 under adjustments to income. The key document is Form 1098-E, the Student Loan Interest Statement, issued by loan servicers if at least $600 in interest was paid during the year. Those who paid less than $600 may not receive a 1098-E but can still deduct the amount by reviewing loan statements or online account records.

It is important to verify that the reported interest matches personal records, as errors can occur. If discrepancies arise, contacting the loan servicer for a corrected form is necessary. Keeping proof of payments, such as bank statements or payment confirmations, is also recommended in case of an audit. This is particularly relevant for borrowers who refinance their loans, as interest payments made to the original lender may not always transfer correctly to the new servicer’s records.