Student loans are a necessary part of earning a college degree for millions of people. Without access to affordable financing, many would be unable to pursue their goals of getting the job they want based on the education they received.
However, student loans are often a burden to borrowers, with long-term payment schedules and high balances that can make it difficult to plan for other financial goals. Fortunately, having student loans isn’t completely negative once you enter repayment. For some, having a student loan balance means you can decrease your effective tax rate.
Student loan borrowers, both federal and private, who meet certain requirements may qualify for a student loan interest tax deduction each year. With this tax deduction, borrowers can receive some relief while repaying student loan balances, based on the amount of interest they pay each year, their income, and their tax filing status.
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How to Use This Student Loan Interest Tax Deduction Calculator
The student loan interest tax deduction calculator below provides your potential savings, should you qualify for it.
It’s simple to use. You begin by selecting whether or not someone can claim you as a dependent on their tax return for the current year.
You then input your modified adjusted gross income and the way you plan to file your taxes for the year (i.e. single, married joint or married separate). After those details are included, you can add in your student loan information. This includes if payments were made on student loans during the tax year and how much interest was paid throughout the year. If you are married, you are also required to input your spouse’s modified adjusted gross income for the year.
Based on these details, the calculator generates the amount of the student loan tax deduction available and how that impacts your tax refund. If you are unsure of any of the details needed to complete the calculation, look to your student loan servicer for the total interest paid, and your taxes for the previous year or pay stubs from the current year to determine your modified adjusted gross income.
Calculate Student Loan Interest Deduction
The Impact of Student Loans on Federal Taxes
Having student loan debt is not all bad, especially when you qualify for the student loan interest deduction. Being eligible for the deduction reduces your total tax obligation based on how much you can deduct from your income.
While this is beneficial to some taxpayers with student loan debt, there may be other tax strategies, including taking the standard deduction, that may work more in your favor. It is important to check with a tax professional to determine what may work best for your financial circumstances.
The availability of the student loan interest deduction depends on several factors unique to you, your household status, your income, and your filing selection. Factor in these nuances to understand all your options for lowering your tax liabilities each year.
Do You Qualify for the Student Loan Interest Deduction?
Not everyone will qualify for the student loan interest deduction tax credit. The IRS has laid out specific rules as to who is eligible based on the following factors:
- Your modified adjusted gross income cannot be more than $80,000 as a single filer, or $160,000 as a married filer. The total amount of the deduction begins to gradually phase out starting at a modified adjusted gross income of $65,000 for single individuals, and $130,000 for married couples.
- You must not be claimed as a dependent on anyone else’s tax return for the year
- You must have student loans that are in repayment
- You must have made interest payments for your student loans throughout the year
Additionally, the student loan interest deduction is only available up to $2,500 per year for qualified student loans.
As an example using the student loan interest deduction calculator, an individual taxpayer who earns $40,000 in income for the year and paid $1,000 in interest on student loans receives a deduction of $1,000.
Reducing the Cost of Student Debt
The student loan interest deduction does offer a tax break for many, however, that may not be enough to counter the cost of your debt. This is especially true for those who earn higher income or who have a spouse who is a high-earner. Fortunately, there are other ways you can reduce the cost of your student loan debt.
Refinancing may be an option for your federal or private student loans. Through a private lender, borrowers can take out a new loan to pay off multiple student loans, creating one streamlined payment and, potentially lowering the cost.
For those who qualify, private refinanced student loans may offer a lower interest rate than their current loans. This can significantly lower the cost of the loan as it is repaid. You may also reduce your repayment plan term when refinancing a loan, which can ultimately save on total interest paid.
Some student loan borrowers may also qualify for student loan forgiveness or cancelation after a set number of qualifying monthly payments are made. Loan forgiveness wipes away the remaining balance of a loan, leaving you with no ongoing obligation to make student loan payments. If you work in public service you may be eligible for this valuable benefit, which can eventually drastically reduce the cost of borrowing.
The student loan interest deduction calculator above allows you to gain insight into how much you could save by claiming the interest deduction if you qualify for it.
Check with your loan servicer about how much student loan interest you have paid during the year and know your taxable income before plugging in your details into the calculator. Once you have an idea of how much you can save with the interest deduction and your eligibility, you can plan accordingly for how to manage your student loan.
Author: Melissa Horton
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