According to the EducationData.org research group, there are more than 43 million student borrowers in debt, with an average debt of $39,351 each. If you’re one of these borrowers, you may want to know if the interest you pay can be deducted.
Generally speaking, the answer is yes (although subject to certain limits)—but if your adjusted gross income exceeds certain levels, the deduction is phased out, and these levels aren’t as high as they are for many other deductions.
Deducting student loan interest
$2,500 is the maximum amount of student loan interest that a borrower can deduct each year, and only interest from “qualified education loans” can be deducted.
“Qualified education loans” are debts incurred to pay for the borrower’s tuition, room and board, and other expenses related to attending a post-secondary educational institution, including some vocational schools. Certain post-graduate programs also qualify, such as internships or residency programs offering post-graduate training at institutions of higher education, hospitals, or health care facilities and leading to a degree or certificate.
Deductions can be claimed regardless of when the loan was originally taken out and whether or not interest payments made on the loan in earlier years were deductible.
For 2021, the deduction is phased out for single borrowers with an adjusted gross income between $70,000 and $85,000 (for married couples filing jointly, this amount is between $140,000 and $170,000). Single taxpayers with adjusted gross income of more than $85,000 and jointly-filing couples with an adjusted gross income of more than $170,000 cannot claim the deduction.
In order to claim this deduction, married taxpayers must file jointly.
Deductions of student loan interest are taken “above the line,” meaning that they’re subtracted from gross income to determine adjusted gross income. As such, these deductions are available even for borrowers who don’t itemize their deductions.
Ineligible borrowers
Taxpayers who can be claimed as a dependent on another person’s tax return cannot claim these deductions.
If, for example, a parent is paying for the college education of their child and is claiming this child as a dependent, the interest deduction will only be available for interest paid by the parent on a qualifying loan—any interest the child may pay on a loan they’ve taken out cannot be deducted.
However, the child will be able to deduct any student loan interest they pay in later years once they’re no longer a dependent.
Additional rules and requirements
To be deductible, interest must be on funds that are borrowed to cover the qualified education costs of either the taxpayer or their spouse or dependent, and the student must be a degree candidate who is carrying at least half the normal full-time workload. In addition, the education expenses for which the funds are borrowed must be paid or incurred within a reasonable time of the loan being taken out.
In order to verify qualifying expenditures, taxpayers need to keep records. While documenting tuition expenses doesn’t usually pose a problem, taxpayers looking to deduct student loan interest should carefully document other qualifying education-related expenses, such as books, fees, transportation, and equipment.
For students that are living and dining on campus, documenting room and board expenses should be relatively simple—but students who are living away from campus should maintain records of their room and board expenses, especially when complicating factors such as roommates are involved.
If you have questions about this deduction or need help determining if you qualify, contact us.