Parental Deduction of Student Loan Interest

Most interest paid toward personal debt is not tax-deductible, but the government has made an exception for student loan interest. The student loan interest deduction allows you to deduct any interest you actually paid, not just accumulated, on a student loan during the tax year, as long as certain conditions are met.

The maximum deduction is $2,500 and is subject to income limitations. This deduction is actually an adjustment to your taxable income, which means you do not need to itemize your other deductions to get it. You can take the standard deduction and still deduct your student loan interest.

Eligible Interest Payments

The rules for what amounts you can deduct are strict. You can deduct only the portion of each loan payment that represents interest. You may also deduct any fees that you paid upfront to receive the loan, such as origination fees, over the life of the loan.

You also can deduct the portion of your principal loan payments that represents capitalized interest. Your lender calculates this for periods when you're not making payments. For example, capitalized interest may accrue during a deferment immediately after graduation. You can't deduct capitalized interest, though, for a year in which you didn't make any loan payments.

If you paid more than $600 in interest on your student loan, you should receive a Form 1098-E from your lender. This is your Student Loan Interest Statement, which will include the total amount of your payments that were allocated toward interest.

Certain types of student loans do not qualify for the deduction. These would include:

• A loan from a qualified retirement plan like a 401(k) or 403(b)
• A loan between related parties

For example, if your grandparent gave you a personal loan for your education expenses, the interest on the loan would not be tax-deductible.

How to Claim the Student Loan Interest Deduction

All of the following must be true in order for you to claim the deduction:

• Your filing status is not married filing separately.
• No one else can claim you—or your spouse, if you're married—as a dependent on their tax return.
• You are legally obligated to pay the interest on the student loan.
• You actually paid the interest. Accumulation of interest on your balance by itself is not deductible.

The money received from the loan must have been used only for qualified higher education expenses, such as:

• Tuition
• Fees
• Room and board
• Books
• Supplies and equipment

To claim the deduction, use the Student Loan Interest Deduction Worksheet, which is found on page 94 of Form 1040 and 1040 SR Instructions, to calculate how much you can deduct. Then, enter the allowable amount on Schedule 1 (for use with Form 1040 or 1040-SR), line 21.

Deduction Phaseouts

The student loan interest deduction is reduced—or phased out—in part or entirely for taxpayers with certain levels of modified adjusted gross income (MAGI).

If you fall in the middle range of incomes, and your deduction is reduced by the phaseout, you will need to calculate the amount you can deduct. You will multiply your pre-phaseout interest deduction by a fraction based on your income.

The numerator (or top figure in the fraction) will be:

• Your MAGI minus $70,000 if you're single, head of household, or a qualifying widow(er)
• Your MAGI minus $140,000 if you're married filing jointly

The denominator (or bottom figure in the fraction) will be:

• $15,000 if you're single, head of household, or a qualifying widow(er)
• $30,000 if you're married filing jointly

For example, if you're single, you paid $900 in interest on your student loan, and your MAGI was $75,000, your reduced deduction amount is $300.

$900 x (($75,000 – $70,000) / $15,000) = $900 x ($5,000 / $15,000) = $900 x 0.333 = $300

Frequently Asked Question (FAQs)