Student loan interest is interest an individual pays on their qualified student loans during a tax year. Student loan interest includes both required payments and voluntarily prepaid interest payments.
As of January 1, 1998, individuals who have taken student loans to pay the cost of tuition for themselves, their spouse, or their dependents are allowed to deduct at least part of the interest paid on these loans on their tax return. As far as tax deductions, an individual may deduct the lesser of $2,500 or the amount of interest that they paid during the tax year.
What Is the Student Loan Deduction?
As mentioned above, an annual tax deduction of up to $2,500 is generally available for student loan interest paid on an individual’s student loans. However, if you are making student loan interest payments or additional voluntary prepaid interest payments, it is important to always check the current laws governing student loan repayment tax deductions to see if the deductible amount has changed for the tax year that you are filing your tax return.
For the 2022 tax year, If you have paid $600 or more of student loan interest on a qualified student loan during the year, you will receive a Form 1098-E (“Student Loan Interest Statement”) from the entity that you paid the student loan interest to. You may then use that form to determine whether to deduct the lesser of $2,500 or the amount of student loan interest you paid during the year.
It is important to note that the student loan deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (“MAGI”) amount reaches the annual limit for your specific tax filing status.
Are There Any Limits to Student Loan Interest Tax Deductions?
Similar to other tax deductions, there are limits on student loan tax deductions made during the tax year that may prevent an individual from being able to claim the deduction for themselves. For instance, an individual can only claim the student loan interest deduction if all of the following apply:
- If neither the filer nor their spouse, if filing jointly, can be claimed as dependents on another person’s tax return;
- If the filer’s modified adjusted gross income is less than a specified amount that is set annually;
- If the filer’s filing status isn’t married, filing separately;
- If the filer is legally obligated to pay the student loan interest on a qualified student loan; and
- If the filer paid interest on a qualified student loan in the tax year in which they are seeking the deduction.
What Is a Tax-Qualified Student Loan?
In legal terms, a tax-qualified student loan is defined as indebtedness that is sustained to pay for the qualified higher education expenses of the taxpayer, a spouse, or any other dependent in attending a college, university, post-secondary educational institution, certain trade schools, or other establishments eligible to join in Department of Education student financial assistance programs.
Will Receiving a Scholarship Affect An Individual’s Tax Deductions?
It is important to note that certain expenses are reduced by additional financial assistance, such as a scholarship. Examples of other assistance that certain expenses may be reduced by include:
- Veterans’ educational assistance;
- Tax-free gifts and inheritances;
- Tax-free employer educational assistance;
- Tax-free IRA educational distributions; and
- Interest from United States Savings Bonds used for educational expenses.
Due to the reduced expenses from the additional financial resources received, the additional resources, such as a scholarship, may affect how much an individual takes out in student loans. Then, the amount taken out in student loans and the payments made towards those loans may subsequently affect how much that individual can claim as a tax deduction.
What Happens If I Can’t Make Payments On My Student Loans?
There may be some options available to you if you cannot make payments on your student loans. You should be careful to avoid defaulting on the loans, which will significantly damage your credit and increase the amount that you owe. If you are having trouble making payments, potential options include:
- Loan cancellation;
- Postponing payments through forbearance or, deferment; or
- Filing bankruptcy and discharging the loans.
A forbearance is a postponement of payments in which the loan holder (the bank or agency that granted you the original loan) allows you to stop making payments for a specific time. Forbearances apply only to the principal sum owed; as such, interest will continue to accrue. Forbearances are easier to obtain than deferments but are less attractive because your total balance due will increase during a forbearance as a result of accruing interest.
Deferment refers to a postponement of loan payments due to certain conditions being met for a certain amount of time. An example of this would be how you may be able to get a deferment for being unemployed or for going back to school.
The amount of extra time a deferment gives you varies depending on the loan, and sometimes deferments postpone payments of the principal due and the interest. However, it is never possible to receive a deferment if you have defaulted on your student loan.
Can Student Loans Be Canceled?
In short, yes, an individual may be able to cancel all or part of their loan by:
- Teaching disabled students and low-income populations;
- Joining the military or other uniformed service;
- Performing community service;
- Proving that the university you attended closed down;
- The university was falsely certified; or
- As a refund for a school that you applied for but never attended.
Importantly, cancellation of loans means that the loans are wiped clean, and any expected payments in the future are canceled. Additionally, prior payments are also reimbursed. However, it is important to remember that loans are essentially a contract. As such, if a school cannot fulfill its end of the contract, it should not and would not be paid for services that were not rendered.
Do I Need A Lawyer for Help With Student Loan Interest?
As can be seen, tax law is often a very complicated area of the law to understand. Additionally, available deductions to individuals may differ from state to state. Additionally, the deductions and how to qualify for the deductions may change from tax year to tax year.
As such, if you are making payments towards a qualified student loan or making prepayments toward a student loan, it is in your best interests to consult an experienced tax attorney if you have any questions regarding student loan interest or deductions. An experienced tax attorney can help you understand current tax law and how that law may affect your income tax problem.
Additionally, an experienced tax attorney will also be able to answer any of your questions regarding the deductibility of your expenses. An attorney may also be able to guide you into minimizing your income tax bill or discharging your student loans altogether. Finally, an attorney will also be able to represent you at any in-person legal proceedings if you are being called into tax court.
