Did You Know That You Can Deduct Student Loan Interest?
Published 8:40 am Thursday, March 9, 2017
By Drew Cloud, The Student Loan Report
Walk into the average office or business, and you will find that many people are struggling to keep up with the burden of student loans. Going through college and graduating is perhaps the easy part of getting an education, but paying for it later is the hard part. Over the past few decades, there has been a rise in college fees that has only been matched by the rise in student loan debt. Consequently, many graduates are stuck with paying off an average of $16,929 in student debt for years, if not decades, after graduation. This is a fact that cannot be ignored.
There is another fact about student loans that might actually prove helpful. If you have been struggling with a student loan, you should be glad to discover that it is tax deductible. It may sound a little unrealistic, but in fact, student loan interest can be written off as tax deductible. A deduction is limited to paid interest of up to $2,500 in a tax year. While small, this can still end up being quite helpful. Here are a few more details about this “student loan benefit.”
Basic Deductible Requirements
There are a couple of basic conditions to meet for your student loan interest deductible.
First, you need to be legally obligated to pay it, so you cannot be in any sort of grace of deferment period. After making an interest payment on a qualified student loan within a tax year, you can file those payments as tax deductible. Keep in mind that interest payments are tax deductible up to $2,500 per year.
When you are filing your tax returns as a single filer, your income should be below $60,000 to be eligible for the tax deduction. In addition to that, an eligible filer must have been a student who was enrolled in an accredited program that led to a degree, certificate, or other recognized credential. Additionally, the tax filer must have been enrolled at least half time while pursuing their education.
While this covers interest, there is another way to get a little tax help on your student loans.
What to Look Out For
If you interpreted the information above as a total student loan deductible, then keep in mind that this deductible applies to only interest payments. While the principal balance on your loan is significant, it does not come into play when filing taxes. If the loan was taken out in your parent’s name, then your parent is eligible for the tax deduction; however, neither of you can file the deduction if you are listed as a dependent in your parent’s tax return. The tax deductible is generally available to lower income independents.
How Does This Save Money?
The whole point of filing tax deductions is to have more money in your pocket at the end of it all. Deducting student loan interest lowers your taxable income, and the result is less money out of your pocket. You’ll have to make interest payments throughout the tax year, but after filing these, you should receive more back from federal and state. You still spend all that money on interest, but you can get a little more back from other federal and state taxes. Keep in mind that this does not offer monthly relief. A tax deductible is filed for tax returns which come once a year, so the check is piled onto that lump sum at the end of the tax season.
The amount of your modified adjusted gross income (MAGI) determines the amount of your deduction. Anyone with a MAGI that is below $60,000 will have no trouble filing the tax deduction. Deduction eligibility gets hazy when your MAGI is between $65,000 and $80,000 for a single return or between $130,000 and $160,000 for a joint return. You will not be able to claim your student loan interest if your MAGI is over $80,000 for a single return or over $160,000 for a joint return.
Student loans are meant to benefit to you with access to higher education. Often heard today, the only significant impact student loans seem to have is everlasting monthly payments. On the contrary, the tax deductible is discussed sparingly today. This is just one way to alleviate the burden of student loans, but there is one drawback. This relief only comes once a year, and you have to file your taxes successfully. Nonetheless, this is just one proactive way to limit the overall cost of student loans.