Looking for a Student Loan Interest Deduction? You May Still Qualify

Student loan. 3D Animation Production Company/Pixabay

During the pandemic, students who had government student loans did not need to make any loan repayments. The interest was also stopped from accumulating, beginning Mar. 13, 2020. At the same time, borrowers were able to deduct interest paid on their loans up to $2,500 per year from their taxes.

Last year, President Joe Biden passed a bill to eliminate the student loans carried by millions of students. His plan was put on hold by the courts and is still in limbo—and, with it, the ability to claim any further student loan interest deduction.

StudentAid says that the payment pause will end when the court issues have been resolved—or by June 30, 2023. The U.S. Supreme Court expects to hear the case near the end of February. Payments will begin to be required 60 days later.

Money Paid During the Payment Pause

If you have made any payments toward your loan, all of it will be used to reduce your principal. Any past-due interest or fees will be paid first. According to SavingforCollege, if you continued to make payments after the payment pause began—and you did not have to make them—then you cannot claim an interest deduction because all your payments went to paying down the principal.

Borrowers Who Cannot Claim a Tax Deduction

If a student was not required to make payments during the payment pause, they cannot claim the interest deduction for 2022. Students with other types of school loans who had to make payments may be able to claim it if they made payments in 2022.

Whether or not you can claim a tax deduction on your education loan also depends on your modified adjusted gross income (MAGI). If you made more than $85,000 as an individual during 2022 or more than $175,000 as a couple, you cannot claim the deduction. Married couples living separately are also ineligible. You would not be able to claim the full amount if, as a single, you made between $70,000 and $85,000 or, if married, you earned between $145,000 and $175,000.

Another group that cannot claim a deduction is those whose employer made payments on their student loan. Since you did not make payments, the deduction is not available.

Unqualified School Loans

In addition to private loans, some others are ineligible for the interest deduction. They include:

• non-defaulted Federal Family Education loans not held by the Department of Education (DoE)
• Federal Perkins loans not held by DoE (defaulted and non-defaulted)
• non-defaulted HEAL loans

People That May Be Able to Claim the Deduction

If you took out private student loans or a Federal Family Education loan, you may have needed to make interest payments on them during the payment pause. The interest you paid on your student loans may be eligible for a tax deduction, but you would need to contact your lender to be sure.

Others who might be able to claim the deduction are those who obtained a loan for a spouse or a dependent. LendingTree says that if you had loans from federal or private sources or ParentPLUS loans, which were to pay for your child’s education. They must be loans in your name (or your spouse’s name), and money paid toward your child’s loan is not deductible.

Limits of the Deduction

If you are wondering if you can carry over a balance of interest paid when it exceeds $2,500, TurboTax says no. The limit is $2,500, so you cannot claim interest payments above that amount. Any balance is lost—except that it will help to reduce your overall bill.

Payments from Other Sources and Loan Forgiveness

Students who receive some financial assistance to pay for their college loans could be affected on their taxes. SavingforCollege states that this kind of situation—or complete forgiveness of the loan—could lead to having to report more income on your taxes. You will need to know how it will affect you before accepting it.

Other Benefits You May Claim

There are two other benefits you could claim that would lower your taxes and may put money in your pocket. They do not depend on whether or not you can itemize, but they will decrease your adjusted gross income. It is a credit, so even if you do not regularly file a tax return, you may be able to get some free cash. You can apply for the credits even though you may have used money from your school loan to pay for them.

• The American Opportunity Credit

The credit is for those in their first four years of college and working toward a degree. You can claim up to $2,500 per student for each year you are in college. The credit enables you to cover the cost of tuition, books, fees, equipment, and supplies needed for the year.

• The Lifetime Learning Credit

This credit also enables you to cover the cost of tuition, fees, books, equipment, and supplies needed for courses taken at a college or career school. StudentAid says you can claim up to $2,000 for required materials, but only the ones you must purchase from the school.

The Refinance Option

If you are having difficulty making your monthly school loan payments or just would like to get lower payments, you may be able to refinance your student loans. A student loan consolidation may also enable you to get better terms. Refinancing your loans should wait until the payment pause period is over—if you have qualified government loans.

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