As students from elementary age to grad level across the country head back to school this month, parents are grappling with how to pay tuition, buy school supplies and fit in all of those extracurricular activities. It can be difficult to figure it all out, and in an era where everyone seems to have an opinion about school (and paying for it), it can be even more difficult to separate fact from fiction. In my Back To School Myths series, I’ll help you sort truths from myths when it comes to school and taxes.
Today’s myth: There is no longer a deduction for student loan interest.
The student loan interest remains in place.
So why so much chatter about the demise of the student loan interest? It likely got its start as part of a meme that appeared earlier this year:
The meme—and the subsequent rumor—was probably linked to the history of the tax reform bill. Under the House and Senate proposals, most above-the-line deductions, including the deduction for student loan interest, would have been eliminated. That didn’t happen: In the final version of the Tax Cuts and Jobs Act of 2017, the deduction for student loan interest remained in place.
(You can read more about what survived the tax chopping block – and what didn’t – here.)
Still, the rumor persisted. It was further complicated by the release of the draft form 1040 this summer. The current form 1040 includes the line for deducting student loan interest on the front page. However, in the new draft version, the student loan interest deduction no longer shows on the front page leading some taxpayers to conclude that it had been eliminated.
That didn’t happen.
So, let’s clear up the myth that the student loan interest deduction has disappeared once and for all with a closer look.
Allowing a deduction for interest paid on personal loans—including home mortgage interest—has long been controversial. Interest for student loans was actually not deductible for about a decade following the Tax Reform Act of 1986. However, that changed in 1997 when, as part of the Taxpayer Relief Act, the deduction for interest paid for student loans used to pay for higher education on an individual tax return was reinstituted. It’s been tweaked a bit since but remains deductible.
Today you can reduce your income subject to tax each year by up to $2,500 of qualified student loan interest per tax return. That’s per return, not per taxpayer: The cap is the same for married couples as individuals. The amount includes both required and voluntary interest payments.
Your student loan must have been taken out to pay qualified education expenses. This includes tuition and fees; books, supplies, and equipment; and other necessary costs such as transportation. Room and board may be included, but some restrictions apply.
To be deductible, your student loan does not have to come from PHEAA or another institutional student loan provider. You can include other debt, such as credit cards, bank loans, or a line of credit if you use those loans only to pay qualified education expenses—do not commingle expenses. Borrowed funds cannot be from a related person or made under a qualified employer plan.
The student who borrowed the funds must be you, your spouse, or your dependent, and must have been enrolled at least half-time in a degree program when the loan was taken out. For purposes of the student loan interest deduction, an individual can be your dependent even if you are the dependent of another taxpayer; even if the individual files a joint return with a spouse; and even if the individual had gross income for the year that was equal to or more than the exemption amount for the year.
As with other education tax breaks, you must reduce your qualified education expenses by the total amount paid for employer-provided educational assistance; tax-free distribution of earnings from a Coverdell education savings account or a qualified tuition program (QTP); U.S. savings bond interest previously excluded from income; tax-free scholarships, fellowships and grants; and veteran’s benefits.
You can typically deduct all of the interest you paid on your student loan until the loan is paid off, subject to phaseouts. The student loan interest deduction is phased out (reduced) if your modified adjusted gross income (MAGI) is more than $80,000, or $165,000 if filing a joint return; for most taxpayers, MAGI is the adjusted gross income on their federal income tax return before subtracting any deduction for student loan interest. You may not deduct your student loan interest if you file as married filing separately or if someone else claims an exemption for you on his or her tax return.
If someone else makes a payment on your behalf, the payment can be treated for federal income tax reasons as though you made the payment. For example, if your mom and dad pay some of your loans, you can still claim the interest for purposes of the deduction. But be careful: If your parent claims you as a dependent, but you are legally obligated to pay the loan, then neither one of you can take the deduction.
You should receive a tax form from your lender each year showing the amount of interest that you paid. Generally, if your lender received interest payments of $600 or more during the year, the lender is required to send you a form 1098-E by January 31.
In years past, the student loan interest deduction appeared on the front page of form 1040 at line 33. It’s technically an adjustment to income, sometimes called an “above the line” deduction, since you may claim it without regard to any Schedule A deductions. Or in more simple terms, you can deduct your student loan interest if you claim the standard deduction or if you itemize your deductions.
Today that line 33 is indeed missing on the front page of the draft form 1040. So where did it go? It’s been moved to a new Schedule 1 (you can review the draft Schedule 1 here as a PDF), where it remains tentatively on line 33.
I hope that clears up the confusion. The student loan interest deduction hasn’t been eliminated as part of tax reform; it’s just been moved to a new schedule.
For more in the series, follow along this week!
