Student loans can open the door to educational opportunities you otherwise might not be able to afford on your own. But once you have that hard-earned diploma in your hand (or displayed proudly on your wall), those same student loans often become a source of stress.
At tax time, there are a few ways to include your student loans while filing your taxes. And if you’re still in school, there are also a few tax credits that might help you.
Do student loans affect my tax returns?
It depends. If you are still in school and receiving money from student loans, you should not consider that income, since you are obligated to pay it back.
If you have graduated and are making payments on your student loans, then your student loans may affect your tax returns. Depending on your income, type of loan and tax filing status, you may be able to deduct some of the student loan interest you pay.
Are student loans tax-deductible?
While the principal amount of your student loans is not tax-deductible, the interest you pay on your student loans might be. Depending on your total income, you may be able to deduct up to $2,500 in student loan interest from your taxable income each year.
If you are still attending school or paying education expenses, you may also qualify for one of two different education tax credits: the American Opportunity Tax Credit and the Lifetime Learning Credit.
What is the student loan interest deduction?
Taxpayers who pay interest on federal or private student loans may be able to take advantage of the student loan interest deduction. If you qualify for the deduction, you can reduce your taxable income by up to $2,500 per year.
The deduction, however, is set up so that the more income you earn, the less student loan interest you may be able to write off. Once your income reaches the limit set by the IRS, the deduction goes away altogether.
The income limits for the student loan interest deduction change each year. For the 2020 tax year, they are as follows:
- Single, head of household and qualifying widow(er): The deduction starts to phase out when your modified adjusted gross income (MAGI) reaches $70,000. At $85,000, the deduction disappears completely.
- Married filing jointly: The deduction phaseout begins once your joint MAGI reaches $140,000. If your joint income surpasses $170,000, you can no longer claim the student loan interest deduction.
Note: You can’t claim the student loan interest deduction if your filing status is married filing separately.