The Federal Student Loan Interest Deduction

The student loan interest deduction is an advantageous tax deduction that you can claim if you take the standard deduction or if you itemize your deductions. This deduction is in the Adjusted Gross Income section on the first page of Form 1040. It will reduce your adjusted gross income, if you’re eligible to claim it, and can directly affect your eligibility for numerous other deductions and tax credits.

Reporting Student Loan Interest

There’s no need to dig through all your student loan statements for the year, looking for notations on how much interest you ultimately paid. Your lender should send you a Form 1098-E sometime after the first of the year. The amount of interest you paid is reported in box 1.

Are You and Your Loan Eligible?

You can deduct interest on student loans paid by you or by your spouse if you file a joint return, but you can’t claim the student loan interest deduction if you file a separate married return. You must use the single, head of household, qualifying widow(er) or married filing jointly filing status.

You or your spouse must also be legally obligated to repay the loan — one or both of you are the signatories — and neither of you can be claimed as dependents on anyone else’s return.

The loan must be a qualified student loan for the benefit of you, your spouse or for your dependent.

Loans from a qualified employer plan aren’t qualified, nor are private loans from family or friends.

Limits and Income Limitations

The most student loan interest you can claim as a tax deduction is limited to $2,500 as of the 2016 tax year, and the limit remains the same in 2017.

The deduction is also limited by your income — it’s reduced for taxpayers with modified adjusted gross incomes in the phaseout range and eventually eliminated if your MAGI is too high.

What Is Modified Adjusted Gross Income?

Your modified adjusted gross income is critical to the computation of whether you’re subject to the deduction phaseout. It’s your all-important adjusted gross income before you take other deductions into account. These include the student loan interest deduction you’re hoping to qualify for — you can’t deduct this first before calculating your MAGI. You must also add back in any deductions you took for tuition and fees on line 34 of your 1040, and for domestic production activities which would appear on line 35.

You must also add back the following exclusions and deductions if you took any of them, but these are somewhat rare:

  • The foreign earned income exclusion
  • The foreign housing exclusion
  • The foreign housing deduction
  • The income exclusions for residents of American Samoa or Puerto Rico

Student Loan Interest Deduction Phaseouts

The phaseout ranges for the 2016 tax year are:

Filing Status Phaseout Begins Phaseout Ends
Married Filing Jointly 130,000 160,000
Qualifying Widow(er) 65,000 80,000
Head of Household 65,000 80,000
Single 65,000 80,000

If your MAGI is under the threshold where the phaseout begins, you can deduct up to $2,500 in student loan interest. Your limit is prorated if your MAGI falls within the phaseout range.

The IRS explains how to calculate the reduced student loan interest deduction:

“If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. To figure the phaseout, multiply your interest deduction (before the phaseout, but not more than $2,500) by a fraction. The numerator is your MAGI minus $65,000 ($130,000 in the case of a joint return). The denominator is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct.” (from Publication 970, chapter 4).

Unfortunately, your student loan interest isn’t deductible at all if your income is more than the ceiling where the phaseout ends.

You can use the worksheet found in Publication 970 to calculate the deductible portion of your student loan interest.