Can I Take Advantage of the Student Loan Interest Tax Deduction?

03/06/2014 03:31 pm ET | Updated May 06, 2014

For those of us in the early part of our financial life-cycles, the little things can make a big difference. This is especially true for student loan borrowers like myself. Since it's tax season, I wanted to devote a little time to one of these little things: the Student Loan Interest Tax Deduction. You may or may not have heard about it, so I'd like to dispel a few common misconceptions about the deduction and also get into how (and if) you can take advantage of it.

Bottom line, you can benefit from the deduction even if you:

1. Have private student loans

2. Don't itemize your deductions and

3. Make over $60,000 in a given year.

These are all reasons I've heard friends and student loan borrowers give for not bothering with the Student Loan Interest Tax Deduction or their 1098-E. And all of them represent misconceptions about how the deduction works.


Before I go too deep, let me just say that you should use the official guidance from the IRS for reference and as final authority. I'm not an accountant, and am simply attempting to distill the information in that publication.

First, some extremely basic tax terminology. This is a "deduction" in the sense that it can be used to reduce the amount of income that the government taxes. So what's happening is, the federal government is coming at your annual income with the applicable tax rate and saying you made $X. And you're saying, ""No, no, government, I really made slightly less than $X because of this nifty rule you wrote about student loan interest, so you only get to tax $X minus the Student Loan Interest Deduction." It's helpful to think of any deduction as an amount you're legally allowed to exclude from the taxable income you're reporting to the government.

Someone who knows just enough about taxes to be dangerous might say, "Well if it's a deduction, then I'd have to itemize my deductions right? I've heard that this is something you should only do if you're a homeowner or wealthy. What's the deal?" Not so fast! The student loan interest deduction is what's known as an "above-the-line" deduction. So there's no need to itemize your deductions in order to benefit. If that's Greek to you, then don't worry about it. It just means you don't need to get bogged down in tax elections or complications to benefit from the student loan interest deduction!

Furthermore, you can take advantage of the deduction whether your loans are private or federal. There are a few provisos here (one can't deduct interest on debt to a family member), but I will say that you can deduct interest on "private student loans" as that term is generally used. And you can do so even if you've refinanced or consolidated your debt.

If you're concerned about calculating how much interest you paid in a given year, don't worry, your student loan servicer will make that easy for you. Your servicer is the company that manages your repayment (the people you pay every month). These are the people you've likely worked with to set up direct debit or to manage any repayment issues. For federal loans, that's usually either Sallie Mae, MyFedLoan (PHEAA), NelNet or Great Lakes. For a full list of the services that manage federal loans, see this website. Your servicer is obligated to deliver a neat little form to you, the 1098-E, which lays out how much interest you paid on your student loan in the previous tax year. This is the amount you can deduct from your income (or $2,500 if you paid more than that in student loan interest)!

Final point, your income does affect your eligibility for the deduction. To get a sense of just how much, you'll first need your Modified Adjusted Gross Income (MAGI). This, for most student loan borrowers, is just your adjusted income before taking into account the student loan deduction. Fortunately, most tax services (e.g., TurboTax) and your accountant will be able to tell you your MAGI for these purposes. If your MAGI is $60,000 or below ($125,000 or below if filing jointly), then you can deduct the smaller of $2,500 or the student loan interest you paid in 2013. If your MAGI is above $75,000 ($155,000 for joint filers) then you cannot benefit from the student loan interest tax deduction. If you fall in between, then the amount you can deduct is gradually phased out as your MAGI approaches either $75,000 or $155,000. If your income falls near these amounts, then I encourage you to either ask your accountant about the Student Loan Interest Deduction or still attempt to take advantage of it using your tax service.

Even little things like this aren't always simple, but I don't want people to walk away from this tax deduction simply because they misunderstand it. Best of luck with your tax returns!

Nate Howard is Community Curator at CommonBond, a a student lending platform that provides a better student loan experience through lower rates, superior service and a strong commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education.

Biggest Money Mistakes 20-Somethings Make