Student Loan Interest Deduction Basics

February 04, 2016 : Mike Slack

The cost of higher education in the United States continues to rise. According to one study, a college education has surged more than 538% since 1985.

With these rising costs, students and their parents are relying more and more on student loans. As of 2013, 70% of graduating college students had taken out student loans with an average amount borrowed of $28,400. Luckily, the IRS provides a tax break available to those of us trying to pay down our student loans.

The student loan interest deduction is referred to as an “above-the-line” deduction. This means it is claimed in determining your adjusted gross income. That is advantageous because, unlike many other deductions, you don’t have to itemize in order to receive a tax benefit from it.

The amount of your deduction is based solely off of your qualified student loan interest paid in the year.

Example:

You paid $1,000 in student loan interest
You are in the 15% marginal income tax bracket
Result: you can expect to save $150 in taxes based on the student loan deduction alone

In order to qualify for the deduction, the interest must be paid on a “qualified education loan.” To be qualified, the debt must have been incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify.

An internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering post-graduate training can qualify. It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

The student loan deduction has two limitations when it comes to the amount that can be deducted.

First, the maximum amount of student loan interest that can be deducted is $2,500.

Second, the deduction begins to “phase-out” as your income reaches certain thresholds. For 2014 and 2015, the deduction is phased out for taxpayers who are married filing jointly with AGI between $130,000 and $160,000 ($65,000 and $80,000 for single filers). The deduction is unavailable for taxpayers with AGI of $160,000 ($80,000 for single filers) or more.

Also, if you are married you must file a joint return with your spouse in order to claim the deduction. If you can be claimed as dependent on another person’s tax return you will not be allowed to take the deduction, as well.

Still have questions? Make an appointment with one of our tax professionals to get more help.

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Mike Slack

Mike Slack

The Tax Institute, H&R Block

Mike Slack, JD, EA, is a senior tax research analyst at The Tax Institute. Mike leads research teams focused on business and investment tax issues.