How paying off student loans can save you money on your taxes

How paying off student loans can save you money on your taxes

Millions of federal student loan borrowers just made payments for the first time in years — or ever.

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What does that mean for 2023 taxes?

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Student loans eligible for tax deductions

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That means these borrowers could be eligible for a student loan-related break on their taxes.

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Payments were paused for more than three years because of the pandemic. Interest resumed in September and payments for many were due in October.

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The U.S. Department of Education found 60% of the 22 million borrowers with payments due in October made payments by mid-November. More than 4 million owed for the first time.

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These borrowers may now be eligible for the student loan interest deduction on their taxes, alongside other qualifying taxpayers.

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Who qualifies?

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You can claim the deduction if all of the following are true:

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  • You paid interest on a qualified student loan in tax year 2023.

  • You’re legally obligated to pay interest on a qualified student loan.

  • Your filing status isn’t married filing separately.

  • Your modified adjusted gross income is less than a certain amount.

  • You were not claimed as a dependent on someone else’s return. (This also applies to your spouse if filing jointly).

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A qualified student loan is one you took out to pay for qualified education expenses for an eligible student: you, your spouse or a dependent. Those expenses must be paid or incurred reasonably close to when you took out the loan.

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The deduction applies to all loans, not just federal, according to the Office of Federal Student Aid.

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Qualified education expenses include tuition and fees, room and board, books, supplies, equipment, and other necessary expenses such as transportation.

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Your modified adjusted gross income, or MAGI, is defined as the adjusted gross income on your federal income tax return before taking the student loan interest deduction.

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The deduction begins to phase out once your MAGI is more than $75,000 and ends at $90,000 for single filers, according to the IRS. For joint filers, it begins to phase out at $155,000 and ends at $185,000.

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How much can you deduct?

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You can take the student loan interest deduction even if you don’t itemize deductions. That’s because it’s claimed as an adjustment to income.

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The deduction can reduce your taxable income by up to $2,500, according to the IRS, or the amount of interest you paid during the tax year — whichever is smaller.

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If you paid $600 or more in student loan interest, you should receive a Form 1098-E, Student Loan Interest Statement, from the account holder.

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You can’t deduct any interest that your employer paid.

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Is change coming?

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The maximum deduction hasn’t changed since 2001, according to the Education Department and the IRS.

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That’s despite student loan balances skyrocketing.

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Consumers held more than $1.73 trillion in student loans in the third quarter of 2023, according to the Federal Reserve. That’s up from more than $480 billion in 2006, the earliest year with data available.

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Federal student loan debt increased 267.1% between 2006 and 2023, according to the Education Data Initiative.

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In December, the House introduced legislation to increase the deduction limit to $10,000, plus $500 for dependents. It would also include principal payments, not just interest.

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What is The Sum?

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The Sum is your friendly guide to personal finance and economic news.

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We’re a team of McClatchy journalists cutting through the financial jargon so you know how these issues impact your life. We verify information from diverse sources and keep the facts front-and-center, making finance and economic news add up for you.

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Ready to take the first step to getting your finances under control? You can sign up for our five-week budgeting newsletter at thesum.news.

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Profile Picture of Cortlynn Stark

Cortlynn Stark writes about finance and economics for The Sum. He is a Certified Financial Education Instructor℠ with the National Financial Educators Council. He previously covered City Hall for The Kansas City Star and joined The Star in January 2020 as a news reporter. Cortlynn studied journalism and Spanish at Missouri State University.

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