Repaying your student loans can be daunting and seemingly never-ending.
While student loan debt is certainly a burden, there is at least a small silver lining: you may be eligible to receive a tax benefit for the money you spent on your education.
Now, we know taxes are also on the bottom of your list of fun things to talk about.
But, there are important things to keep in mind when it comes to your student loans and taxes to ensure you’re at least reaping the benefits (yes, probably a stretch) of those pesky loans.
1. Student Loan Interest Deduction
The student loan interest deduction is a student loan tax benefit that works to help offset the costs of borrowing and repaying your student loan debt.
Like other tax deductions, the student loan interest deduction reduces the amount of your income that is taxed.
With this deduction, borrowers are able to lower the amount of their taxable income by deducting the amount of student loan interest they paid, up to $2,500.
This can result in paying less in taxes, or receiving a bigger refund.
Per the 2017 Congressional tax estimates, the average dollar value of the student loan interest deduction is $201.
Both federal and private student loans qualify for the student loan interest deduction.
If you paid more than $600 in interest on your student loans in a given tax year, your student loan servicer will automatically send you a tax form 1098-E.
This form will show you exactly how much student loan interest you paid throughout the tax year (try not to faint when you see it).
You will then input this amount onto your main tax form, the 1040.
How to Claim the Deduction
In order to claim the student loan interest deduction, you must meet a multitude of requirements.
If all of the following apply to you, you may claim the deduction:
- You paid interest on a qualified student loan in the tax year you seek to claim the deduction;
- You are legally obligated to pay interest on a qualified student loan;
- Your filing status isn’t married filing separately;
- Your modified adjusted gross income is less than a specified amount (which is set annually); and
- You (and your spouse, if filing jointly) can’t be claimed as a dependent(s) on someone else return.
For example, for the 2018 tax year, a borrower filing as single must have had modified adjusted gross income less than $80,000 in order to qualify for the full interest deduction on their taxes.
2. Credit Card Interest Could Be Deductible
A much smaller and less common benefit that may be available to you come tax season is deducting credit card interest from your taxable income for the year.
If you had a credit card that was solely dedicated to education expenses, the interest charges on said card could be deductible, similar to the way you deduct the interest you pay on your student loans.
It is imperative that every single expense on the credit card was for qualified education-related expenses; even one non-qualifying charge will lead to ALL of the interest being non-deductible.