The student loan interest deduction and its phase out

How it works

The deduction is the interest actually paid during the year, up to this year's official student loan interest deduction max (not yet verified here; see the official source below). It is taken as an adjustment to income, so it is available whether or not the person itemizes. The loan must have been taken out solely to pay qualified education costs for the taxpayer, a spouse, or a dependent at the time, for a student enrolled at least half time in a degree program. The deduction phases out between this year's official student loan interest phaseout single start (not yet verified here; see the official source below) and this year's official student loan interest phaseout single end (not yet verified here; see the official source below) of modified adjusted gross income for single filers, with higher lines for joint filers. A married person filing separately cannot take it, and neither can a person claimed as a dependent on someone else's return. The lender sends a statement each year showing the interest paid when it reaches a small threshold.

What it gives

It reduces income without itemizing, so it stacks with the standard deduction.

It applies to both federal and private student loans.

A parent who took a loan for a child's schooling can deduct the interest too.

What it costs, or where the catch is

The cap is low, and a borrower paying more interest than that gets nothing for the excess.

Higher earners lose it across the phase out range.

A married couple filing separately, often done to lower a loan payment, loses the deduction entirely.

A worked example

Mabel paid $3,100 in interest on her student loans this year and earns $54,000, below the phase out. If the cap were $2,500, she deducts $2,500, and the other $600 earns nothing. At her 22 percent bracket the deduction saves her $550 in federal tax, since $2,500 times 0.22 is $550. Her roommate Zeke earns well into the phase out and finds his deduction cut to about half.

Where it goes wrong

The common miss is a parent paying a child's loan whose interest is deductible by no one, because the loan is in the child's name and the child no longer counts as a dependent.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Tax Topic 456, Student loan interest deduction. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.