If you have a child in college, you already know how expensive it is. If you’re a parent of a student who will soon be graduating high school, you’re about to find out. The cost to attend a college or university keeps going up, and many people are paying off their child’s college education through a student loan. Taking out a student loan won’t help with the overall cost of the education, but it can help in a couple of ways. A student loan gives you time to pay for the education. And you may be able to get a tax deduction to claim on your tax return.
What is student loan interest?
Just like other loans, such as personal loans, car loans, and mortgage loans, student loans have interest rates. These are fees that lenders charge to make money on the loan. Again, as with most other loans, you pay off two things each time you make a loan payment–the loan’s principal (the actual amount of money you borrowed) and the loan’s interest. Lenders charge different interest rates for student loans, and sometimes the rates change during the length of the loan. Loan interest rates are often called an APR, or annual percentage rate. This is the interest rate charged that is stated as a yearly, or annualized, rate.
While many people think that student loans can only be used to pay for tuition and fees, they actually cover other important costs:
- Housing expenses such as dormitories or apartments
- Transportation to and from campus–this includes gas, parking passes, public transportation, and airplane flights to and from school
- Food, such as meal plans and food expenses
- Textbooks, technology, and supplies, including computers and tablets
Is student loan interest tax deductible?
Yes, federal student loan interest is tax-deductible. You can deduct up to $2,500 each tax year as long as you meet the requirements for a tax deduction. These include:
- Your tax filing status is anything except “married filing separately.”
- No one is claiming you as a dependent.
- You are legally obligated to pay interest on a qualified federal student loan.
- You paid interest on a qualified federal student loan.
If you want to deduct student loan interest and you file your tax return as “married filing jointly”:
- You can deduct all $2,500 if your modified adjusted gross income (AGI) is $145,000 or less.
- If your modified AGI is more than $145,000 but less than $175,000, your student loan deduction is gradually reduced, meaning the more money you make, the less student loan interest you can deduct.
- If your modified AGI is $175,000 or more, you can’t claim a deduction on your student loan interest.
If you want to deduct student loan interest and you file your tax return as “single,” “head of household,” or “qualifying widow(er)”:
- You can deduct all $2,500 if your modified adjusted gross income (AGI) is $70,000 or less.
- If your modified AGI is more than $70,000 but less than $85,000, your student loan deduction is gradually reduced, meaning the more money you make, the less student loan interest you can deduct.
- If your modified AGI is $85,000 or more, you can’t claim a deduction on your student loan interest.
How does the student loan tax deduction work?
If you do qualify for a student loan tax deduction, your taxable income may be lower. And when your taxable income is lower, you may be eligible for a lower tax bracket, which can provide you with even more tax savings. As long as you are able to claim a student loan tax deduction, you will not need to itemize your taxes.
Other types of student tax breaks
If you are attending a college or university or have a student who is planning to attend college, it’s important to know that there are other types of student tax breaks besides the student loan interest tax deduction.
Lifetime Learning Credit (LLC)
According to the IRS, the Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can be used to help pay for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit, and it is worth up to $2,000 per tax return.
To claim the LLC, you must meet all three of these qualifications:
- You, your dependent, or a third party pay qualified education expenses for higher education.
- You, your dependent, or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse, or a dependent you listed on your tax return.
College Savings Plans
College savings plans, also known as 529 plans, are investment accounts that offer tax benefits when the funds are used to pay for qualified education expenses of a designated beneficiary. This is usually the child of parents who set up the 529 account. A 529 plan can pay for college, K-12 school tuition, apprenticeship programs, and student loan repayments.
The tax benefits of a 529 college savings plan include earnings growth (from interest) of the money in the account that can’t be federally taxed. Also, no income tax is paid on the growth of the account when you take money out of the account and use it on qualified expenses. You can also deduct contributions to the plan from your state income taxes (not federal, however).
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum credit you can receive each year, per eligible student, is $2,500. Students eligible for the AOTC must:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
Taxpayers receive 100% of the credit for the $2,000 spent on eligible education, then 25% of the credit for the following $2,000 spent.
Credit card interest deduction
If you are able to get a credit card to use only for qualified education expenses, and you pay for those qualified education expenses with the card, you may be able to deduct the credit card interest that you paid on the purchase. Keep in mind that credit card interest rates are usually high. So, even with a tax deduction of the credit card interest, it may still wind up costing you more than taking out a private student loan with lower interest rates.
Prepare your Taxes with Sun Loan
College costs a lot, but there are some ways to get some money back through tax deductions. As we mentioned, student loan interest can be claimed as a deduction on your tax return, and you may also be able to claim certain education credits if you or a student in your home meets the qualifications. If you’re not sure how this factors into your taxes, Sun Loan is here to help!
With more than 20 years of tax prep experience, our tax preparation experts focus on accuracy, find deductions such as student loan interest, and do their best to ensure you get the biggest refund possible. We offer expert assistance for all your income tax needs–and we can help you online, in person at one of our many local branches, or with our drop-off tax service! Stop by today or give us a call at (800) SUN-LOAN.
