Student loan interest deduction: rules and income limits
If you borrowed money for your education or your child’s education, you may be eligible for the student loan interest deduction, which can reduce your taxable income by up to $2,500.
You’re only eligible for the tax deduction if you paid student loan interest during the tax year. Because federal student loan repayments resumed in October 2023, after a three-and-a-half-year pause due to COVID-19, this tax season may be the first time you can deduct your interest payments in several years.
To take advantage of the student loan interest deduction, it’s important to understand the rules. Let’s discuss eligibility requirements, income limits, and what loans qualify, as well as how the reinstatement of federal student loan payments will affect your 2023 tax return.
How to claim the student loan interest deduction
The maximum student loan interest deduction is $2,500 or the total amount you paid in student loan interest during the 2023 tax year — whichever is less. The deduction is what’s known as an above-the-line deduction, which means you can claim it whether you take the standard deduction or itemize deductions on your return.
Eligibility requirements, including income limits
You can deduct some or all of your student loan interest payments on your federal tax return that’s due on April 15, 2024, if you meet the following criteria for the 2023 tax year:
You paid interest on a qualified student loan and were legally obligated to do so.
Your tax filing status isn’t married filing separately.
Your modified adjusted gross income (MAGI) is less than the thresholds listed below.
Neither you nor your spouse (if you’re married filing jointly) are being claimed as a tax dependent on someone else’s return.
Note that the maximum student loan interest deduction is $2,500 per tax return. If you’re married filing jointly and you and your spouse each paid more than $2,500 in student loan interest, your maximum deduction is still $2,500, not $5,000.
What loans qualify?
You can deduct the interest on any qualified student loan, which the Internal Revenue Service (IRS) defines as a loan taken out exclusively for higher education expenses for yourself, your spouse, or someone who was your dependent at the time you took out the loan. Both federal student loans and private student loans qualify for the deduction.
The IRS only allows you to deduct student loan interest if you took on the debt for the following purposes, known as qualified education expenses:
Tuition and fees
Room and board, but only if the cost isn’t more than the amount included in the institution’s cost of attendance
Books, supplies, and equipment
Other necessary expenses, like transportation
You can’t deduct the interest on money you borrowed from a relative or from a qualified employer plan, like a 401(k), even if you used it for educational purposes. If your employer offers student loan repayment assistance, you can’t use the interest they paid to incur tax benefits, including the interest deduction.
Other requirements
You can’t take the student loan interest tax deduction if someone else is responsible for repaying the loan. Let’s say your child got an education loan in their name, but you’re making the payments. You can’t use those payments to lower your federal income tax because your child is legally responsible for the payments. (But if you’d taken out a Parent PLUS loan, you could qualify for this tax benefit because you’d be on the hook for those payments.)
Likewise, if you cosigned a private student loan for someone, you won’t be able to deduct loan interest unless you take over the monthly payment. That’s because the primary loan borrower is responsible for repaying the debt. The cosigner only becomes legally obligated for the debt if the original borrower defaults.
The deduction is only permitted if no one else is claiming you as a dependent on their tax return. For example, if you’re making your student loan payments but your parents include you as their dependent when they file their tax return, neither of you qualifies for the deduction.
Example of how the student loan interest deduction works
Suppose you have $50,000 of federal student loans with an interest rate of 6%. You took advantage of the automatic forbearance that began in March 2020 and didn’t resume payments until October 2023.
Your monthly payment is $555. But you only made three payments during the 2023 tax year that amounted to $1,665 total, $745 of which was interest. So even though the maximum student loan interest deduction is $2,500, you’d only be able to deduct $745.
Now let’s say you make all 12 months’ worth of scheduled payments in 2024. This year, you pay $6,660 toward your student loans, including $2,841 in interest payments. Because the amount of interest you paid exceeds the $2,500 deduction limit, you get the full deduction amount of $2,500.
Keep in mind that the student loan interest deduction is a tax deduction, not a tax credit. That means it can reduce your taxable income by up to $2,500. It doesn’t reduce your tax bill dollar-for-dollar by $2,500 the way a tax credit works.
However, if you’re still a student or you’re paying for a tax dependent’s ongoing education expenses, you may be eligible for education tax credits, like the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).
Restart of loan payments and tax returns
Federal student loan payments resumed in October 2023 after a 37-month hiatus. If you stopped making payments while your loan was in forbearance, you may be able to claim the student loan interest deduction for the first time in three years, assuming you resumed payments. Or if you’d never been responsible for paying your federal loans — for instance, if you graduated or left school after March 2020 — this year could be the first time you’re eligible for the deduction.
For many taxpayers, the deduction will be smaller for the 2023 tax year because only three months’ worth of payments were required. However, you may qualify for a larger deduction next year since you’ll be responsible for payments each month in 2024.
But what if you didn’t resume payments as required? Normally, the U.S. Treasury Department can seize your tax refund if you default on federal student loan payments. But under the Fresh Start program, the U.S. Department of Education has temporarily suspended collections activities for anyone in default. That means you can still receive your tax refund, even if you’ve defaulted on federal loans.
However, the Fresh Start program ends Sept. 30, 2024. If you’re behind on federal student loans, it’s essential to contact your loan servicer before that date about the steps you need to take to bring your loan out of default.
How to deduct student loan interest on your taxes
Fortunately, deducting the interest you paid on your student loans is a simple process. Your student loan servicer will typically send you Form 1098-E tax form if you paid more than $600 in interest for the tax year. Even if you didn’t receive the income tax form, you can contact your servicer or private lender to request the document. You may receive multiple copies if you had more than one servicer in 2023.
Once you know how much interest you paid, deducting it is pretty easy. You’ll enter the number on Line 21 of your Schedule 1 on IRS Form 1040. Most tax filing software, including free tax filing services, will make this process a breeze for borrowers.
FAQs
Who can’t claim the student loan interest deduction?
You can’t claim the student loan interest deduction if your income exceeds the IRS thresholds for the 2023 tax year or if your filing status is married filing separately. You also won’t qualify if someone else can claim you or your spouse as a dependent on their tax return.
Are Parent PLUS loans tax deductible?
Yes, you can deduct the interest you pay on Parent PLUS loans if you don’t earn more than the modified AGI limits for the tax year and you meet the other eligibility requirements for the tax break.
Are student loan interest payments tax deductible if you don’t itemize?
Yes. The student loan interest deduction is an above-the-line deduction, which means you can use it to reduce your taxable income even if you opt for the standard deduction instead of itemizing.
Will I be taxed on student loan forgiveness?
The IRS considers canceled debt, including most forms of student loan debt forgiveness or student loan discharge, to be taxable income.
However, borrowers working toward loan forgiveness have been exempt from taxes thanks to the American Rescue Plan Act of 2021. This measure made forgiven student loans exempt from federal income taxes, but it only applies to loans that are discharged between Jan. 1, 2021, and Dec. 31, 2025.
The American Rescue Plan applies to all student loan forgiveness programs but only affects federal income taxes. Although some states adopted similar measures for state income taxes, not all followed suit.