Student Loan Payoff and Taxes: A Guide to Possible Deductions

The student loan interest deduction remains a valuable tax benefit for college students and parents financing education expenses through loans. 

With the pause on federal student loan payments since March 2020, questions arise regarding eligibility for this deduction.

Despite the payment hiatus, individuals may still qualify for the deduction if they made payments towards capitalized federal loan interest or on non-federally owned loans like private student loans. This distinction underscores the importance of understanding the nuances of eligibility criteria.

Eligibility for the student loan interest deduction hinges on modified adjusted gross income (MAGI), with thresholds set at $70,000 ($145,000 for joint filers). Those with MAGIs between $70,000 and $85,000 ($175,000 for joint filers) can still claim a reduced deduction, albeit not the full $2,500 maximum.

Notably, this deduction operates above the line, directly reducing taxable income, offering a tangible benefit to qualifying individuals. Eligible parties include those who utilized loans for qualified education expenses, made interest payments while in school, borrowed on behalf of dependents, or are obligated to repay the loan.

Student Loan Interest Deductions

The student loan interest deduction form, Form 1098-E, streamlines the process by automatically supplying proof to borrowers who paid more than $600 in interest in 2022. Those who meet the eligibility requirements can still claim deductions even if interest payments are below this cap.

While the entirety of student loan payments isn’t deductible, the interest component offers significant tax savings. 

Furthermore, individuals can explore additional education tax benefits like the American Opportunity Credit, Lifetime Learning Credit, or Tuition and Fees Deduction to maximize tax advantages.

Navigating the landscape of education-related tax benefits requires diligence and awareness of eligibility criteria. Despite the pause in federal student loan payments, the student loan interest deduction remains a valuable tool for reducing tax liabilities, offering relief to borrowers amid the complexities of financing higher education.