Declaring Student Loan Interest at Tax Time: Claiming Educational Interest Payments on U.S. Tax Forms

Many college students in the United States today take out students loans in order to pay for the expenses incurred with higher education. These loans can vary in structure and amount from federal Stafford loans to private loans held by banks or student loan lending institutions.

After a student graduates or ceases to be enrolled at least half-time at a qualifying institution, many student loans begin accruing interest. Other loans begin earning interest on the principle balance once they are disbursed. All of these interest payments can become a hefty expense for college graduates, especially for those with a large amount of debt tied up in student loans.

The Student Loan Interest Deduction

According to the United States Department of Education, anyone who has paid interest on a student loan during a calendar year can claim interest payments on personal income tax filings.

 

There are four criteria to determine whether or not a student loan interest payment qualifies for a tax deduction. According the the Department of Education, all four of the criteria must be met in order to qualify for a deduction:

  1. The filer must have paid interest on a student loan during the tax year in question.
  2. The filer’s status must not be married but filing separately
  3. The filer’s modified adjusted gross income must be less than $70,000 or $140,000 if a couple is filing jointly.
  4. The filer cannot be claimed by someone else as a dependent.

The Department of Education’s definition of a qualified loan is any loan that “is a loan that you took out solely to pay qualified higher education expenses.”

In addition, some scholarships and grants may be taxable. Any amount indicated on the form 1098-T provided by an academic institution in box five must also be documented on tax paperwork.

How to Make the Student Loan Interest Deduction

According to the United States Internal Revenue Service, further instructions and information about deducting student loan interest can be found in IRS Publication 970: Tax Benefits for Education.

Those who have paid over $600 in student loan interest during the tax year will receive the 1098-E form from each loan service provider, explaining the amount of interest paid during the previous year and whether or not this figure includes origination fees for loans disbursed prior to September 2014.

For those filing form 1040, a worksheet for student loan interest is included in the instructions. The IRS says that those filing forms 2555, 2555EZ, or 4563 should use the form in the Publication 970.

For filers who have had student loans canceled, they should consult a tax preparation professional because there are special circumstances for student loans that have been canceled by the Department of Education or a loan servicing institution.

Higher education can be an expensive investment, but the added expense of student loan interest is not strictly isolated to monthly payments. Making sure to include student loan interest on income tax paperwork can save a filer money on taxes paid and prevent the possibility of an audit in the future.