Student Loans: You May Be Interest Deductible Even If Payments Are Paused — Here’s Why

Student loan borrowers can usually deduct the interest they pay on the loan from their income tax returns, but this hasn’t been the norm in recent years. Interest deductions didn’t work because federal student loan suspensions enacted during the COVID-19 pandemic left millions of borrowers no longer having to pay their loans or their interest.

Student Loan Forgiveness: A Timeline of Events Leading to Supreme Court Review
Learn: 3 ways smart people save money on their tax returns
Student Loan Forgiveness: Am I Eligible for a $0 Payout Under Biden’s New Plan?

So did 2022. However, some borrowers will be able to deduct student loan interest from their tax returns this year, even if some of their loans were suspended last year.

This applies if you have student loans that aren’t eligible for the suspension of payments, CNBC reports. Examples include commercially held Federal Family Education Loans (FFELs) and private student loans. In such cases, you may be able to deduct interest on the loan. However, loans subject to the 2022 full payment moratorium are not eligible for the deduction.

The best way to find out if you can deduct interest is to contact your loan servicer.

The IRS defines student loan interest as interest paid in the year covered by the student loan. You can deduct $2,500 or the amount of interest you actually paid for the year, whichever is less. The deduction amount will be reduced over time and eventually phased out once your Modified Adjusted Gross Income (MAGI) amount reaches the annual limit for your application status.

You don’t need to itemize your deductions because they are claimed as adjustments to your income. You can claim a deduction if:

• Paid interest on a qualifying student loan in tax year 2022.
• You are legally obligated to pay interest on eligible student loans.
• Your filing status is not married filing separately.
• Your MAGI is below a certain amount that is set each year.
• If you apply jointly, neither you nor your spouse can claim to be someone else’s returning dependent.

Note that student loan interest deductions no longer apply once you reach a certain income. For the 2022 tax year, individuals earning over $85,000 and couples earning over $175,000 are not eligible.

Eligibility for deductions may also be reduced if employers make student loan payments as working benefits, Betsy Mayotte, president of the Association of Student Loan Advisors, told CNBC.

According to the IRS, if you paid $600 or more in interest on eligible student loans during the year, you should receive a Student Loan Interest Statement on Form 1098-E from the institution that paid your student loan interest.

Tax Questions? Ask a Tax Pro

For more information about student loan interest deductions and how MAGI affects your deductions, see IRS Publication 970 and the IRS page Can I Claim a Deduction for Student Loan Interest?

Learn more about GOBankingRates