Are You Eligible for an Education or Student Loans Tax Credit?

According to the latest student loan debt statistics, nearly 45 million borrowers now owe a combined total of over $1.5 trillion in student loan debt. And if you’re using post-tax dollars to repay your student debt, you are essentially paying taxes on your student loans. Fortunately, you may be eligible for a student loan tax credit, student loan deductions, or both.

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In this article

    Can I claim student tax credit?

    Most students can claim some type of tax credit if they either paid qualifying educational expenses to attend college at least half-time or they are actively repaying their student loans. The most common types of student tax credits are federal tax credits and deductions, but select states offer a tax credit on student loans as well.

    The Lifetime Learning Credit (LLC)

    If you are still in school and accruing educational expenses, you may qualify for the Lifetime Learning Credit as a credit to your taxes. To qualify, you must be enrolled in a higher education program for at least one academic period, and you must be working towards a degree or other recognized academic credential. Additionally, if you are an individual filer for the 2019 tax year, your adjusted gross income must be less than $68,000, and if you are married filing jointly, your household adjusted gross income must be less than $136,000 to receive the credit. If you qualify, you can receive a tax credit of 20% of the first $10,000 of qualified educational expenses per year, up to $2,000.

    [ See: Should You Bank on Student Loan Forgiveness in 2021? ]

    The American Opportunity Tax Credit (AOTC)

    Previously called the Hope Education Credit, this federal tax credit is only offered to students for their first four years of higher education. To be eligible, students must have attended a qualifying educational institution in pursuit of a degree or other recognized academic credential at least half time and have not yet completed the first four years of higher education by the start of the tax year. Qualifying students can receive a tax credit of up to $2,500 each year, and if a student’s tax liability is zero, they can receive up to $1,000 of the tax credit in the form of a refund.

    The federal student loan interest tax deduction

    Former students who are still repaying student loans can qualify for a federal tax deduction on student loan interest they repaid throughout the tax year. To qualify, the student loan must have been for qualifying higher education expenses for the taxpayer, their spouse, or a qualifying dependent. Former students can deduct the actual amount of student loan interest paid, up to $2,500.

    State-based deductions

    Most states allow taxpayers to claim the federal tax credit on student loans on their state taxes, but a few states offer even more breaks for residents by offering a state-based student loans tax credit. In Minnesota, for example, taxpayers can receive a credit for up to $500 every year as long as they live in the state and made qualifying eligible student loan payments.

    How to claim the student loan interest deduction

    To claim the student loan interest deduction, you must first make sure you qualify to take the credit based on the requirements listed by the IRS and your income levels. To begin the process for claiming the deduction, you should:

    1. Get your 1098-E form(s) from your student loan servicer(s). This form lists how much interest you paid during the tax year and will be your proof for the IRS that you calculated your deduction correctly. If you didn’t receive this form in the mail, you may be able to print it from your servicer’s website.
    2. Verify that you meet the requirements. The IRS provides a helpful tool to assess your eligibility to deduct your student loan interest on your taxes. Gather the info requirements listed at the top of the verification tool homepage and complete the assessment to verify your eligibility.
    3. If you are eligible for the deduction, begin the process of filing your taxes. If you use a tax preparer, be sure to take the information you gathered in steps one and two so they can calculate the deduction for you. If you prepare your taxes on your own, use the information you gathered in steps one and two to calculate your qualifying deduction amount.

    How much can you save after a student loan tax deduction?

    Exactly how much you can save with student loan deductions depends on which tax bracket you’re in and how much you can deduct in student loan interest. A rough estimation of your tax savings can be calculated by multiplying your deduction by your highest tax bracket.

    If, for example, you make $55,000 per year, your highest tax bracket is currently 22%. If you were able to deduct the entire $2,500, this would save you approximately $2,500 * 22% = $550. Assuming the same income and tax rates, if you only paid (and deducted) $1,000 in student loan interest, your overall tax savings would be $1,000 * 22%, or $220.

    [ More: How to Avoid the Tax Bomb on Your Student Loans ]

    Who is eligible for a student loan tax deduction?

    The primary requirement to qualify for student loan deductions is to have made interest payments on your qualifying student loans during the tax year. As a single filer, if you earned less than $70,000 in adjusted gross income in 2019, you could deduct all the interest paid, dollar-for-dollar, up to $2,500. The deduction phased out for income earners over $70,000 per year, and individuals who earned more than $85,000 per year were no longer eligible.

    To legally take the credit, taxpayers must also meet several other requirements:

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    • You must not be claimed as a dependent on anyone else’s tax return.
    • Your filing status must be something other than “married filing separately”.
    • Your interest must be paid on a qualifying student loan for yourself, your spouse, or your dependent.
    • You were legally obligated to pay the interest on the loan.

    Student loan FAQs

    Yes, you can receive the student loans interest deduction for any interest paid on graduate loans, as long as you meet all other requirements to take the deduction.

    When paying taxes on your student loans, the amount of your deduction will be determined by the amount of interest you paid in that tax year. You can only deduct the actual amount of interest you paid, up to $2,500.

    Tax credits generally save you more money as they directly reduce the amount of tax you owe. If you receive a tax credit for $2,000, the amount of taxes you owe will be reduced by the entire $2,000. A tax deduction only reduces the amount of your taxable income. For example, if you receive a $2,000 tax deduction, your taxable income would be reduced by $2,000, but depending on your income tax bracket, this may only save you around $400 in taxes.

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    Julia Taylor

    Contributing Writer

    Julia Taylor is a freelance writer based in Nashville, TN. She takes complex business, financial, and technical topics and makes them easy to understand. You can find her work published on a variety of business blogs, including Paychex, Kapitus, Sanford Brown, Fortis Educational Institutes, American University of Antigua and Interest.com

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    • Adam Benjamin
      Adam Benjamin
      Editor

      Adam Benjamin is an editor for The Simple Dollar, Reviews.com, and Freshome. He covers everything from finance to internet providers and hopes to make it accessible for all readers.