Tax Breaks for Repaying Student Loans

During our webinar about Student Loans 101 (Repaying), participants asked dozens of questions about deferments and forbearance, grace periods, repayment plans, tax breaks, loan discharges, loan forgiveness and default. Here are the answers to many of the questions about tax breaks for student loans:

Can you deduct your student loan payments?

You can deduct the interest portion of a student loan payment (up to $2,500 per year), but not the principal payments. This includes capitalized interest, which is still counted as interest and is assumed to have been paid on a prorated basis. 

To claim the student loan interest deduction, you must be legally obligated to make the loan payments. For example, a parent may claim the student loan interest deductions on payments they make on a parent loan or a private student loan they cosigned. Parents cannot claim the interest they pay on a federal student loan. They also cannot claim the interest they pay on a private student loan if they did not borrow or cosign the loan. 

If a parent pays the interest on a federal student loan, the student may be able to claim the student loan interest deduction on their own federal income tax return based on those payments. In effect, the payments by the parent are treated as a gift from the parent to the student, who then makes the loan payments.

However, to claim the student loan interest deduction, the borrower must not be claimable as a dependent on someone else’s federal income tax return. This distinction is based on whether the borrower can be claimed as a dependent, not whether they actually are claimed. A student under age 24 is considered to be a dependent and therefore cannot claim the student loan interest deduction.

Married borrowers who file separate returns are not eligible for the student loan interest deduction. There are also income phaseouts that limit the ability to claim the student loan interest deduction.

For those repaying student loans, do they get a tax credit or a tax deduction for payments of student loan interest? Does it matter whether the loan in question is federal or private?

The student loan interest deduction lets taxpayers deduct up to $2,500 a year in interest paid on qualified education loans. The student loan interest deduction is an above-the-line exclusion from income, so you can claim it even if you don’t itemize.

Qualified education loans include all federal student loans, such as the Federal Direct Stafford Loan and Federal Parent PLUS Loan. Qualified education loans also include most private student loans and private parent loans. 

The student loan interest deduction is phased out at $70,000 to $85,000 in income for single filers and $140,000 to $170,000 for married filing jointly. The income phaseouts are adjusted annually for inflation. These are the 2020 income phaseouts.

The $2,500 limit is the same for single and married taxpayers. 

The typical savings is about $300. The maximum possible savings is $600.

Who gets the 1098-T for a Parent PLUS loan that is being repaid by the student?

IRS Form 1098-T is the tuition statement issued by the college. IRS Form 1098-E is the student loan interest statement issued by an education lender.

The lender must provide a copy of Form 1098-E to the borrower, not to the person who is making payments on the loan. Only the person who is obligated to repay the debt may claim the student loan interest deduction. On federal student loans, this is the borrower. On private student loans, this is the borrower and the cosigner.