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Making Payments on a Student Loan? The Interest Might Be Tax Deductible!

If you are working hard to make the payments on your student loans, then I may have some good news for you: the interest may be tax deductible! Yes, that's right, just like with mortgage interest, you might be able to deduct student loan interest, but with a twist: you can do it even if you don't itemize deductions!

What Qualifies for a Deduction?

According to the IRS, any loan taken out solely to pay qualified education expenses, and not from a relative or made under a qualified employer plan, qualifies for a tax deduction of up to $2,500.

The student for the loan must also be you, your spouse, or your dependent; and have been enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.

There is an income cap, however. The deduction is only available for taxpayers with a Modified Adjusted Gross Income (MAGI) of $80,000 for someone filing single, head of household, or "qualifying widower," or $160,000 for a married borrower filing a joint return.

What is your MAGI?

Good question! To calculate it, take your Adjusted Gross Income (AGI) and add back certain deductions.

  • Student loan interest
  • One-half of self-employment tax
  • Qualified tuition expenses
  • Tuition and fees deduction
  • Passive loss or passive income
  • IRA contributions, taxable social security payments
  • The exclusion for income from U.S. savings bonds
  • The exclusion under 137 for adoption expenses
  • Rental losses
  • Any overall loss from a publicly traded partnership

Many of these deductions are rare, so it's possible your AGI and MAGI can be identical.

What Interest Amounts Do I Use?

Okay, that's great, but what is included in interest that can be deducted? According to an article on the IRS site, it can include:

  • Loan origination fee. In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, it must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan.
  • Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan.
  • Interest on revolving lines of credit. This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses.
  • Interest on refinanced student loans. This includes interest on both consolidated loans (loans used to refinance more than one student loan of the same borrower), and collapsed loans (two or more loans of the same borrower that are treated by both the lender and the borrower as one loan).

The deductibility of student loan interest is a bit complicated, so you should talk to a tax professional to see if you can do it. With all the hard work you put into making the payments, wouldn't it be nice if you could get some of the money back?

Need Help With Your Loans?

If you live in the Gloucester County, New Jersey area and are looking for a more affordable repayment plan, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.

If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.

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Steven J. Richardson
Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.