Studying in the USA can be extremely expensive, but the quality of education is so good that lakhs of young students still opt to study there each year. Most young students have to take a student loan from a bank to fund their education, and depending upon the interest rates and monthly payments, it can take years for the student to pay them off completely.
Most people write a check every month to their banks in the process of paying back their student loans. However, many people don’t know that you can get a tax break, which can be very advantageous for you! Thankfully, student loans interest tax-deductible in the USA!
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What Is a Student Loan Interest Deduction?
An income tax deduction that allows you to subtract about $2,500 from your taxable income if you have paid any student loans is called student loan interest deduction. It is advantageous for students or their parents (whoever is paying back the student loans) to know about this because, more often than not, people don’t even realize that they can save this huge amount of money every year!
Read More: What is Student Loan Forgiveness in the USA?
Is Student Loan Interest Tax-deductible in the USA?
The answer to this is yes! Student loan interest is tax-deductible in the USA, and many people end up missing this great opportunity to save some money! Of course, you need to figure out first if you qualify for student loan interest deduction or not. Here is how you can find out:
Qualifications for Student Loan Interest Deduction:
- The student loan must be either in your name or in the name of your spouse or dependent. In case someone else can claim you as their dependent, then you are not the one who will get to claim the deduction.
- The student loan has to be taken out during an academic period where the student is enrolled in any program which leads to a degree, a certificate or some recognized credential.
- The loan amount is only to be used for qualified higher education expenses, such as college and tuition fees, supplies and textbooks, or other course-related material and equipment.
- The school, university, or college where the student is enrolled should be a recognized and eligible institution.
- Any private loans or loans from a qualified employer plan do not come under the student loan interest deduction.
- You are not eligible for this deduction if you are married but filing separately.
How Can You Claim Your Student Loan Interest Deduction?
Your student loan interest deduction is something you can claim without itemizing, although many people still choose to itemize it. That is your choice. You need to attach a document called Schedule 1 to your tax return when you are doing this.
Another important document which you need to know about is the 1098-E Student Loan Interest Statement. This document will come directly from your loan provider. In case you have taken student loans from multiple providers (as long as they are not personal loan providers like family, relatives, or an employer), you need to receive this statement from each of your loan providers.
You will most probably receive this document in your email, after which you can download a copy of it. In case you don’t get one in your email, you can log into the website of your loan provider and download a digital copy.
You can then use the help of services on the internet or a professional to calculate your deduction.
In case you are filling out your form by hand, you can calculate the deduction yourself. Here is how you can do it:
- Calculate your MAGI or Modified Adjusted Gross Income. In case this number falls under $70,000, you can file for a full loan interest deduction. However, if the MAGI number falls between $70,000 and $80,000, you can only file for a partial deduction. Unfortunately, if your MAGI number exceeds $85,000, you can no longer file for the student loan interest deduction. This rule applies if you are a single tax filer.
- In case your filing status falls under married filing jointly, you will be able to claim a full student loan interest deduction if your MAGI is below $140,000. In case the number falls in between $140,000 and $170,000, then you can only file for a partial student loan interest deduction. In the same way, if your MAGI number exceeds $170,000, then you are no longer eligible to register for this loan deduction.
- Now, once you have calculated your MAGI, you need to divide this number by $15,000. Next, convert the figure to a decimal with three decimal places. In case the figure is more than 1.000, you will use the number 1.000 itself for the calculation. However, if the number falls below 1.000, then use whatever amount you have calculated.
- For the next step, multiply your student loan interest (paid up to $2,500) with this decimal point. This will give you the figure of your student loan interest deduction.
Why Is the Student Loan Interest Deduction Beneficial?
Many people either are not aware of the student loan interest deduction or are not bothered about it. However, doing this can be beneficial as you can end up saving as much as $2,500 every year from this deduction. Paying off your student loans can be a long and arduous process as it is, and any deductions can go a long way in saving your money.
Whether you have taken your student loans from a US bank or any other foreign bank, you can still apply for the student loan interest deduction as long as you fulfil the requirements.
Read More: How to Pay off Student Loan Fast?
The deduction can be very valuable, so it is essential to document all your student loans properly, as you will need these papers when you are filing for the deduction. You should get help from a professional if you are unsure how to calculate it yourself, and you can end up saving a ton of your money every year with just this one simple move.