For many, tax season offers an opportunity for reflection; a chance to assess financial goals, considerations and opportunities for the year to come. For millions of borrowers, however, student loans and the interest paid on them may add a layer of complexity that could impact their tax obligations.
Fortunately, there are student loan interest tax deductions available that can help lessen the financial burden on borrowers. In fact, you may be able to save on your annual tax bill by claiming a deduction for the interest paid on student loans for yourself, your spouse or your dependent(s).
But how exactly does student loan interest tax deduction work? Let’s dive into the details to better understand student loan interest deductions and how you may be able to claim yours.
Are student loan payments tax deductible?
Yes, you may be able to take a tax deduction (up to $2,500 per year) for the interest paid on student loans that you took out for yourself, your spouse, or your dependent(s). This benefit is not limited to federal student loans and is applicable to private student loans you may have used to pay for higher education expenses.
The interest paid on your student loan balances can typically be treated as an “above the line” deduction. This means the amount of student loan interest you paid (up to $2,500 annually or the amount of interest you actually paid, if lower) can be deducted from your taxable income.
Because the threshold to qualify for this deduction is subject to change, and the maximum available deduction is tiered based on income and filing status, we recommend you speak with financial and tax advisors before you file.
Let’s go through the qualifying criteria for student loan interest deductions in detail.
Student loan interest deduction qualifications
To claim deductions on your student loans, you’ll have to meet all the following conditions:
- You paid interest on a qualifying student loan during the previous tax year.
- You’re legally liable for interest on a qualifying student loan.
- You’re not filing your taxes as “married filing separately”.
- Your MAGI is low enough that you still qualify for the deduction (see above).
- Neither you nor your spouse (if you’re filing jointly) can be claimed as a dependent.
The IRS states that your loans qualify for deductions if they were used solely to cover higher education costs that were:
- For you, your spouse or a dependent when you initially took out the loan;
- For an eligible student’s education during an academic period; and
- Paid or incurred within a reasonable amount of time before or after you received the loan.
For 2021, the amount of your student loan interest deduction is gradually reduced if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint return).
The interactive tax assistant tool by IRS can help you determine whether you can deduct the interest you paid on your student or educational loans. Be sure to confirm your eligibility with a certified tax advisor before filing.
Does refinancing my student loans affect my taxes?
Refinancing your student loans may impact your annual tax obligation because it will likely affect your interest rate and therefore the interest paid. For example, refinancing with a lower interest rate would lower how much interest you pay, which may result in a lower deduction.
Depending on your personal circumstances and your specific financial goals, a lower deduction may not be a drawback. If you refinance at a significantly lower interest rate, you could potentially save much more in the long run than you would with a large tax deduction.
As you consider your refinancing options, please note that some refinancing solutions may not be eligible for this deduction. Before you make a decision, we recommend you consult a tax professional and review the terms and conditions of each refinancing option and those of your current student loans. Refinancing may mean that you sacrifice certain benefits afforded to you by the federal government or your current lender (including, but not limited to, the interest tax deduction).
Student loans and taxes summary
Ultimately, the impact of student loan interest on your taxes may vary based on your unique circumstances. While an interest deduction can help alleviate the some of the burden of your student loans if you qualify, there may be other solutions that better suit your needs – now and for the future.
Before you make a decision, it is important that you take stock of your current finances and set aside time to speak with qualified financial and tax advisors who can help weigh the options available to you.
How can First Republic help?
Exploring ways to lighten the burden of your student loans? Consider refinancing your student loans and more with a First Republic Personal Line of Credit.
Personal Line of Credit offers flexible access to credit with low, fixed interest rates and no origination or prepayment fees. Use the First Republic Personal Line of Credit Calculator to see your rate today.
As you consider your options, note that First Republic's Personal Line of Credit cannot be used for the direct payment of post-secondary educational expenses.
Since First Republic’s Personal Line of Credit is not a student loan, you may be permanently giving up the benefits of a student loan such as certain deferment, forbearance and forgiveness options. Please consider this as you make a decision to refinance student loans, and talk to a banker if you have any questions.
Currently, all payments for certain types of federal student loans are suspended potentially until June 30, 2023, per an executive order by the President. Interest will not accrue during this time period. For more information, please visit ed.gov.