If you paid interest on a higher education student loan in 2023, you might be eligible to deduct up to $2,500 of what you paid, thanks to the Student Loan Interest Deduction.
What is the Student Loan Interest Deduction?
The Student Loan Interest Deduction is a tax deduction that may allow you to reduce your taxable income by the amount you paid in student loan interest, up to $2,500 in 2023. You do not have to itemize your deductions to claim the Student Loan Interest Deduction. You may be limited, or prevented from claiming it entirely, however, depending on your income level and a few other factors.
Note: The deduction only applies to the portion of your payment dedicated to interest. The portion dedicated to principal (the amount you originally borrowed) does not qualify and is not tax-deductible.
Is student loan interest deductible?
Whether your student loan interest is tax-deductible depends on whether you meet a few IRS requirements:
- You paid interest on a qualified student loan in the tax year for which you're filing.
- You were legally obligated to pay the interest.
- Your filing status is not married filing separately.
- You or your spouse (if filing jointly) can't be claimed as a dependent on someone else's return.
Loans that qualify for the Student Loan Interest Deduction can be federal or private, and they can be for you, a spouse, or even a dependent. They also must meet certain requirements, including use of the funds for certain higher education expenses, such as tuition and fees for an eligible student (you, your spouse, or your dependent).
Student Loan Interest Deduction income limit
Outside of the above requirements, the biggest determining factor in whether you can deduct your student loan interest payments from your taxes is whether you exceed the Student Loan Interest Deduction income limit. This is decided based on your modified adjusted gross income level, or MAGI.
MAGI is everything you earn in a tax year minus certain adjustments the IRS allows—such as how much you contributed to an individual retirement account (IRA), among others—depending on what type of deduction or credit you're trying to claim. With MAGI for the Student Loan Interest Deduction, you must add back to your adjusted gross income (AGI) certain adjustments normally allowed when calculating your AGI, like student loan interest payments, foreign earned income, foreign housing exclusion, foreign housing deduction, and income from Puerto Rico and American Samoa.
To claim the Student Loan Interest Deduction, your MAGI must be $90,000 or less for single filers and $185,000 or less for joint filers in 2023. The deduction phases out for single filers with MAGIs of $75,000 to $90,000 and joint filers with MAGIs of $155,000 to $185,000.
How much is the Student Loan Interest Deduction?
For some, the Student Loan Interest Deduction is the smaller number of either $2,500 or the exact amount of interest you paid during the tax year. However, a phaseout plan may reduce or eliminate the deduction amount based on your reported MAGI.
Here's how to figure out how MAGI may affect your student loan tax deduction:
| If your filing status is… | And your MAGI is… | Then your Student Loan Interest Deduction is… |
|---|---|---|
| Single, head of household, or qualifying surviving spouse | Not more than $75,000 | Not affected by the phaseout |
| More than $75,000 but less than $90,000 | Reduced because of the phaseout | |
| $90,000 or more | Eliminated by the phaseout | |
| Married filing joint return | Not more than $155,000 | Not affected by the phaseout |
| More than $155,000 but less than $185,000 | Reduced because of the phaseout | |
| $185,000 or more | Eliminated by the phaseout |
Source: IRS Publication 970
If your MAGI reduces your deduction, here's how to determine how much you can deduct.
Multiply your pre-phaseout interest deduction (or how much interest you paid; this number can't be more than $2,500) by a fraction:
For single filers, your fraction is: (Your MAGI − $75,000) / $15,000 Then subtract the resulting number from your pre-phaseout deduction.
For those married filing jointly, your fraction is: (Your MAGI − $155,000) / $30,000 Then subtract the resulting number from your pre-phaseout deduction.
As an example, let's say a single filer with a MAGI of $80,000 paid $1,100 in interest on a qualified higher education student loan in 2023.
Step 1: $1,100 (interest paid) x ($85,000 − $75,000) / $15,000) = $733.33 Step 2: $1,100 − $733.33 = $366.67
This taxpayer would be allowed to claim a Student Loan Interest Deduction of $366.67.
What about state income tax breaks for student loan interest payments?
Most states offer deductions on student loan interest and some offer student loan credits to qualifying taxpayers. Check with your local tax authority.
How to claim the Student Loan Interest Deduction
If you paid at least $600 in student loan interest, your loan service provider will send you a 1098-E form. If you didn't pay at least $600, the interest you paid may still be deductible if you're eligible; ask your loan servicer how much you paid in interest. Because of the pandemic payment pause and 0% interest on federal student loans, many of those borrowers didn't reach the threshold for receiving the form in 2023.
If your employer offers student loan payment as a benefit, you cannot claim any amount they paid toward interest that was excluded from income. You may have to look at your payment history to see how much interest you paid versus how much was paid with pre-tax employer benefit funds to determine how much you can claim.
Once you've determined that you are eligible to claim the deduction and have calculated the amount of the deduction, enter the number on line 21 of Schedule 1 on Form 1040.
Other deductions and credits to consider
In addition to the Student Loan Interest Deduction, you may qualify for other education tax credits, including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). These tax credits can be applied against certain current educational expenses required to attend an eligible institution, but not loans.
Remember that deductions reduce your taxable income whereas credits reduce the amount of tax you owe dollar-for-dollar. The maximum credit is $2,500 for the AOTC and $2,000 for the LLC. The AOTC is a partially refundable credit, meaning if you owe less tax than the amount of the AOTC, you can get a refund of up to 40% of the credit (up to $1,000). The LLC is not refundable, meaning it can reduce the amount of tax you owe, but you won't be refunded any of the credit. You can only claim either the AOTC or the LLC (not both) for the same student in the same year, contingent on eligibility.
There are also other deductions and credits you might want to consider as you prepare your 2023 tax return.