All You Need to Know About Student Loan Interest Deduction

The last three years have been full of unprecedented policy brought on by unprecedented events, including the global COVID-19 pandemic. One of those policies was a pause on federal student loan payments, which, after 43 months, came to an end in September of 2023. 

At Steward Ingram & Cooper, our CPAs work to offer our clients the knowledge and resources to make informed financial decisions for both themselves and their businesses. That includes any news about student loan interest deduction, its recent changes, and resources available to lower your student loan payments.

Resumption of Federal Student Loan Payments

In March 2020, the COVID-19 pandemic brought a temporary pause to federal student loan payments. This suspension provided relief for borrowers, allowing them to redirect their finances toward other essential needs during a challenging time—and direct their money back toward consumption to boost the economy. 

The suspension came to an end, however, in September of 2023, when student loan balances once again began to acquire interest. Payments themselves resumed in October of 2023. 

Student Loan Interest Deduction

According to one Forbes report in the summer of 2023, total student loan debt in the country is up to $1.75 trillion, including federal and private loans, with $28,950 owed per borrower on average.

These are staggering numbers, and most borrowers will once again feel the weight of these payments now that the waiver has come to an end. There are, however, options to help alleviate some of that weight. 

The Student Loan Interest Deduction is a valuable tax break designed to help reduce the financial strain of repaying student loans. Here’s what you need to know about it:

Who Qualifies for the Student Loan Interest Deduction

To claim the Student Loan Interest Deduction, you must meet specific criteria. 

• You must have a legal obligation to repay the student loan. This usually means that you are the borrower listed on the loan agreement.
• The loan must be a qualified student loan. This includes federal student loans, private student loans, and some Parent PLUS loans. Loans from friends, family members, or employers do not qualify.
• Your Modified Adjusted Gross Income (MAGI) must be below a certain threshold. For the 2023 tax year, the MAGI limits are $85,000 for single filers and $170,000 for married couples filing jointly. The deduction gradually phases out as your income approaches these thresholds and is entirely unavailable for those exceeding them.
• You must file as either a single taxpayer or a married couple filing jointly to be eligible for the deduction.
• You must have paid interest on the qualified student loan during the tax year.

How Much Can I Claim for a Student Loan Interest Deduction

The student loan interest deduction covers interest payments on qualified student loans during the tax year. It does not include the principal loan amount or any fees associated with the loan. The actual amount you can deduct depends on the interest you paid during the tax year, your income, and other factors—the maximum deduction you can claim is $2,500. 

As mentioned above, the student loan interest deduction amount will gradually phase out as your income approaches the limit specified ( $85,000 for single filers and $170,000 for married couples filing jointly) and your filing status. The student loan interest deduction is not available at all for those whose income exceeds those limits.

If you are filing as single, head of household, or qualifying surviving spouse:

• And your annual income is less than $70,000, your maximum available student loan interest deduction is not affected 
• And your annual income is between $70,000 and $85,000, your maximum available student loan interest deduction is reduced
• And your annual income is $85,000 or more, your maximum available student loan interest deduction is eliminated 

If you are filing jointly as a married couple:

• And your annual income is less than $145,000, your maximum available student loan interest deduction is not affected 
• And your annual income is between $145,000 and $175,000, your maximum available student loan interest deduction is reduced
• And your annual income is $175,000 or more, your maximum available student loan interest deduction is eliminated 

How to Claim the Student Loan Interest Deduction

Filing for the Student Loan Interest Deduction is a straightforward process:

• Gather Documentation: Collect all the necessary documents, such as your student loan statements and records of the interest you’ve paid throughout the tax year. If you paid at least $600 in interest your loan service provider should send you a 1098-E form with these details. If you didn’t pay at least $600, you can contact your loan provider to find this number. 
• Complete IRS Form 1040 or 1040A: When filing your federal income tax return, use either Form 1040 or Form 1040A. These forms have a dedicated section where you can claim the Student Loan Interest Deduction.
• Report the Deduction: On the appropriate line of the tax form, report the amount of student loan interest you paid during the tax year, up to the maximum limit of $2,500.
• Submit Your Tax Return: Ensure that your tax return is accurate and complete. You can file your taxes electronically or by mail.

A local CPA can help you through the process of claiming your student loan interest deduction, including correctly determining your deduction amount. 

Resources to Lower Student Loan Payments

In addition to the student loan interest deduction, there are other resources available to help you lower your student loan payments.

Income-Driven Repayment Plans

These federal repayment plans, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE) Plan, and Income-Contingent Repayment (ICR) Plan, are designed to make your monthly payments more affordable based on your income and family size. 

• SAVE: Around 10 percent of your discretionary income.
• IBR: If you are a new borrower, on or after July 1, 2014, usually 10 percent of your discretionary income. If you are not a new borrower on or after July 1, 2014, 15 percent of your discretionary income. For all borrowers, the amount is never more than the 10-year Standard Repayment Plan amount.
• PAYE: Typically 10 percent of your discretionary income, as long as it doesn’t exceed the 10-year Standard Repayment Plan amount.
• ICR: Either 20 percent of your discretionary income or what would be paid with a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. 

These plans can also lead to loan forgiveness after a certain number of qualifying payments.

Loan Forgiveness Programs

Certain professions and careers may qualify for loan forgiveness programs. For example, teachers, public service workers, and healthcare professionals may be eligible for Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness.

PSLF allows some who have worked in public service for at least 10 years or more to have all student debt canceled if they are eligible. 

Teacher Loan Forgiveness can be received by those who have taught full-time for five consecutive years at a low-income school. While Teacher Loan Forgiveness does have limits, it may be best for those who do not have a lot of debt. 

Refinancing

Refinancing involves taking out a new loan with a private lender to pay off your existing student loans. This can lead to a lower interest rate and reduced monthly payments, but it’s important to note that refinancing federal loans can result in the loss of federal borrower benefits.

Employer Assistance

Some employers offer assistance with student loan repayment as part of their employee benefits package. Check with your employer to see if such a program is available to you.

Tax Credits 

Some education tax credits may also help reduce the amount you owe when it comes time to file your taxes. Unlike a deduction, which is an amount that reduces your taxable income, a tax credit is an amount you can subtract from the total tax you owe. 

The American Opportunity Tax Credit and the Lifetime Learning Credit are two of the most popular tax credits for offsetting the costs of education. 

• American Opportunity Tax Credit(AOTC): The AOTC allows you to claim up to $2,500 per student per year. This only applies to the first four years of school.
• Lifetime Learning Credit (LLC): The LLC allows you to claim up to $2,000 per student per year. This can be used for the costs of tuition, as well as for books and other supplies. 

Contact Our Raleigh CPAs for Help Filing for Student Loan Interest Deduction

As federal student loan payments have resumed, understanding the student loan interest deduction is more important than ever—and can provide immense relief to those who need it. Remember to stay informed about any changes in tax laws and take advantage of any available programs to help you reduce the burden of student loans.

Have any questions about student loan interest deduction? Want to be sure you are filing correctly come tax time? Contact our team of Raleigh CPAs at Steward Ingram & Cooper PLLC today. We offer solutions for optimizing your tax strategy while remaining compliant with IRS regulations, whether it’s student loan interest or any other potential deductions you may qualify for. 

Contact us today by calling us at  (919) 872-0866 or filling out the form below to get started.