Massachusetts Student Loan Interest Deduction: What You Need to Know

Massachusetts offers a state tax deduction for student loan interest, helping borrowers reduce taxable income. This benefit is separate from the federal deduction and has its own rules. Understanding eligibility, loan types, and deduction limits ensures maximum savings when filing state taxes.

Who Can Claim This Deduction

Massachusetts residents who paid interest on a qualified student loan during the tax year may be eligible. The filer must be legally responsible for repaying the loan, either as the primary borrower or a co-signer. Parents who took out loans in their own name for a child’s education can also claim the deduction if they meet all other requirements.

Unlike the federal deduction, Massachusetts does not impose an income cap, allowing high earners to benefit. However, only those filing as single, head of household, or married filing jointly can claim it. Married individuals filing separately are not eligible.

Only interest actually paid during the tax year qualifies. Borrowers in deferment or forbearance who are not making payments cannot deduct accrued interest. If an employer or another party reimburses the interest, that amount is not deductible.

Eligible Loan Types

The loan must have been taken out solely for qualified higher education expenses, such as tuition, fees, and required course materials. Personal loans and credit card debt used for education costs do not qualify. The loan must also be in the name of the taxpayer claiming the deduction.

Federal

Federal student loans, including Direct Subsidized, Direct Unsubsidized, and PLUS loans, qualify as long as the borrower is responsible for repayment. Loans issued under the now-defunct Federal Family Education Loan (FFEL) Program and Perkins Loans are also eligible.

Interest on refinanced or consolidated federal loans remains deductible if the new loan was used solely for education costs. However, if a borrower consolidates student loans with other types of debt, only the interest on the education portion is deductible. Loans forgiven under programs like Public Service Loan Forgiveness (PSLF) or income-driven repayment forgiveness do not generate deductible interest.

Private

Private student loans qualify if they were used exclusively for education expenses. These loans, issued by banks, credit unions, or other financial institutions, often have different repayment terms than federal loans.

Massachusetts follows the IRS definition of a qualified education loan, meaning the funds must have covered tuition, fees, room and board, or other necessary education costs at an eligible institution. If a private loan was used for non-educational expenses, such as excessive living costs, the interest on that portion is not deductible. Refinanced private loans remain eligible as long as they were still used solely for education expenses.

Consolidated

Consolidated loans qualify if they consist entirely of student loan debt. Borrowers who consolidate multiple federal loans into a Direct Consolidation Loan can still deduct the interest if the new loan was used solely for education. The same applies to private loan consolidation, provided no non-education debt is included.

If a borrower consolidates federal and private loans together, the deductibility of interest depends on how the lender structures the new loan. Some lenders issue a single loan combining both types of debt, making it difficult to determine the portion of interest attributable to education expenses. Borrowers should request a breakdown from their lender to ensure they deduct only the eligible portion.

Deduction Limits

Massachusetts allows taxpayers to deduct the full amount of student loan interest paid during the tax year, unlike the federal deduction, which is capped at $2,500 annually. This benefits borrowers with high loan balances or private loans with higher interest rates.

Only interest payments are deductible, not principal payments. Many repayment plans allocate a larger share of early payments to interest, gradually shifting more toward principal over time. Borrowers on extended or income-driven repayment plans may see substantial deductible interest for many years, while those who pay off loans aggressively will see their deduction shrink as principal payments increase.

The deduction is taken as an adjustment to income rather than an itemized deduction, allowing all eligible borrowers to benefit even if they take the standard deduction on their Massachusetts return. Interest paid through employer-sponsored student loan repayment assistance programs is not deductible, as it is already excluded from taxable income under federal law.

How to Calculate the Deduction

Start by identifying the total amount of interest paid during the tax year. This figure is typically reported on IRS Form 1098-E, which lenders issue if at least $600 in interest was paid. Borrowers with multiple loans may receive multiple forms and should sum the interest amounts. If no form is issued—common for lower interest payments—loan statements or lender contact can provide the necessary data.

If any portion of the loan was used for non-education expenses, the interest on that portion must be excluded. Similarly, if a borrower refinanced or consolidated loans and received cash back, only the portion attributable to qualified education debt is deductible. Massachusetts follows federal guidelines in this regard, requiring a reasonable allocation method for mixed-use loans.

Documentation Needed

Proper documentation is necessary to claim the deduction accurately. The most common form is IRS Form 1098-E, which loan servicers issue when a borrower pays $600 or more in interest during the tax year. If multiple loans exist, each servicer may issue a separate form, requiring borrowers to aggregate the amounts manually.

For those who do not receive a 1098-E, alternative records such as monthly loan statements or annual account summaries from the lender can be used. These documents should clearly show the portion of each payment applied to interest. Borrowers who refinanced or consolidated loans should also keep copies of their original and new loan agreements to demonstrate that the debt remains eligible. If any payments were made by a third party on behalf of the borrower, documentation should clarify who made the payments and whether they were reimbursed.

Reporting on State Returns

To claim the deduction on a Massachusetts state tax return, enter the total eligible interest paid on Schedule Y, which reports deductions from income. This amount should match the total calculated from Form 1098-E and other supporting documents. No additional state-specific form is required.

Electronic filers using tax preparation software will typically have the deduction calculated automatically once they enter their student loan interest information. Those filing paper returns must manually enter the deduction on the appropriate line of Schedule Y and transfer the adjusted income amount to Form 1. Since Massachusetts does not impose an income cap on this deduction, all eligible taxpayers can claim it regardless of earnings. Retaining copies of all submitted forms and supporting documentation is advisable in case of future audits or inquiries.