Have you borrowed money to pay for your college? Then you must be wondering Is student loan interest deductible? the quick answer to this is, Yes, the student loan is interest deductible but there are certain conditions.
A student loan is money that is low interest and is borrowed by an individual from the government or a private body to pay for college. Just like any other loan, this money has to be paid back with interest.
In this article, I will discuss everything you need to know about student loans, Is student loan interest deductible, and what are the terms to get the deduction?
Let’s dive in…
Is Student Loan Interest Deductible?
Yes, with student loan interest deduction you can subtract up to $2500 from the tax that you have borrowed to pay for your college. This makes it easy for the students to pay for higher education.
However, this is a deduction on a student loan is not a straightforward subtraction of the money from the funds, this deduction depends on the eligibility criteria. That I will be discussing in a moment.
How Does Student Loan Interest Deduction Work?
There are a variety of tax deductions that are allowed by IRS for the individuals who get federal loans and one of these is the Student loan deduction. Individuals can reduce up to $2500 of the interest that has been paid for the tax year.
This money will actually be subtracted from your taxable income, which will in turn save you money. So if you are falling in the 22% tax bracket then you can claim this student loan interest deduction and reduce your income tax by $550 for the year.
When Is Student Loan Interest Deductible?
You can save quite a lot with student loan deductions but first, you need to understand what is the right way to claim it and who is eligible for the student loan interest deduction.
First thing first, the Student loan interest is deductible if your MAGI or Modified Adjusted Gross Income is not more than $70000. You are eligible for a student loan interest deduction of less than the capped amount of $2500.
Eligibility Criteria For Student Loan Interest Deduction
Following are the things that are required by IRS for you to get a student loan tax deduction for the year
- You can get an interest deduction if the loan applied was for yourself, your spouse, or someone who was a dependent at that time.
- Student loan interest is deductible only if you use the loan for educational expenses, like tuition or boarding, if this loan was used for anything other than educational expenses, then this loan is not interest deductible.
- You have to be legally obliged to pay interest on this student loan.
- The school in which the student is enrolled should be an eligible institution that participates in student aid programs.
How Much Is A Deductible Interest on A Student Loan?
According to IRS, the student loan interest is deductible up to the maximum amount of $2500. Now there is something that you need to understand well, this amount is a deduction and should not be confused with a credit.
This money will be deducted from your taxable income for the year. An example of this would be, let’s say you had $50000 taxable income and you have paid $2500 full in deductible student loan interest.
Now this deduction will reduce your taxable income to $47500. If you compare deductions to credit, they are not as good but still, a penny saved is a penny earned.
You can also improve your credit score, with credit building apps, that will do it for you without even knowing.
What are the limitations of Student Loan Interest Deduction?
There are a few limitations that might make your student loan interest non-deductible. If your income is high you might not be able to apply for a student loan deduction.
If your MAGI (Modified Adjusted Gross Income) is between $70000 to $85000, the student loan interest deduction might be reduced or eliminated entirely. This is for a single taxpayer, if you are filing a joint return it will be $140000-$170000. However, every year student loan interest limits are adjusted for inflation.
If you are filing your tax returns as “married, filing separately” you will not be able to apply for a student loan interest deduction.
Related: Best Budgeting Apps For Students
Student Loan Interest Deductible Form
You will have to fill 1098-E form in order to get a student loan interest deduction. If you have paid more than $600 interest in 2021 you will receive the deduction form in the mail.
If you are filing your taxes online you can also get an online form. Fill in the information of taxes that you have paid over the year and claim your student loan interest deduction.
You will be given a tax break for the interest that you have already paid the previous year.
Student Loan Payment Suspension
On 13 March 2020, President Trump lifted federal student loan repayments with no interest, for the duration of the coronavirus outbreak. Then the day he took office, his first day in office, on January 20 in 2021 President Joe Biden continued the pause until September. 30th 2021.
It was announced that the U.S. Department of Education extended the deadline until January. 31st, 2022, and on December. 22nd, 2021 president Biden renewed the moratorium of the federal student loan for another 90 days – until May 1, 2022.
Be aware, however, that this will not affect loans for private students however it does mean that you will not be able to make interest charges to deduct on any federal student loans when the suspension is in place.
Are Student Loans Good?
Well, most of the time we consider loans a bad thing, however, student loans are long-term loans like mortgages which are considered a “Good Debt”.
By paying this loan every month you build your credit score which will help you in the future, also with a “Good Debt” you get something valuable in return, In the case of a mortgage, you get a house, which increases in value over time. With student loans, you get a college education which increases your overall earning potential.
Along with the loans, you should also learn how to save money, you can use tools and apps that help you save money in real life.
Verdict
Is student loan deductible? Yes, it is. It is a relief to get a deduction on your student loan interest, even though it is not a lot of money but it is still a good amount. There are great apps that give you a loan too, there is no interest to pay and you don’t have to worry about hidden fees too.
I hope this article was helpful and was informative. Share your thoughts in the comments below.
Cheers…