If you borrowed money in the form of a Parent PLUS Loan to finance your child’s college education, then you may be wondering if you qualify for any tax breaks. Good news: As a Parent PLUS borrower, you are eligible to claim the Student Loan Interest Deduction on your taxes.
What is the Student Loan Interest Deduction?
The Student Loan Interest Deduction is a tax deduction provided by the IRS that allows taxpayers to deduct up to $2,500 from their taxable income based on interest paid during the tax year on qualifying student loans. Eligible interest expenses include both those required by the payment terms of a loan and any voluntary pre-payments.
Which Types of Loans Qualify for the Student Loan Interest Deduction?
The types of loans that qualify for the Student Loan Interest Deduction include federal and private loans. The lender can be either the U.S. Department of Education or a private institution, but not a family member or employer. Loans provided by tax-qualified retirement plans are not eligible. Parent PLUS Loans, which are issued by the Department of Education, qualify for the Student Loan Interest Deduction.
Who Qualifies for the Student Loan Interest Deduction?
Borrowers must meet all of the following criteria to claim the Student Loan Interest Deduction:
The student is you, your spouse, or your dependent at the time you obtained the loan;
Your modified adjusted gross income is annually less than $80,000, or $160,00 for a married couple filing jointly;
You do not file taxes as married filing separately;
You, and your spouse if you are a married couple filing jointly, are not claimed as dependents on anyone else’s tax return; and
You are legally obligated to pay interest on the loan.
If your modified adjusted gross income is between $65,000 and $80,000, or between $135,000 and $160,00 for married couples filing jointly, then you can still qualify for the Student Loan Interest Deduction; however, your deduction will be reduced. For taxpayers in these income ranges, the IRS applies a phaseout formula that gradually decreases your deduction as your modified adjusted gross income approaches the upper limit.
What Else is Required to Claim the Student Loan Interest Deduction?
In addition to the criteria above, a borrower must have obtained the loan solely to pay for qualifying education-related expenses. The expenses must have been paid or incurred within a reasonable period of time before or after the loan was obtained. Qualifying expenses generally encompass all the necessary costs of attending school, including:
Tuition and student activity fees;
Room and board;
Books, supplies and equipment; and
Other necessary expenses, such as transportation.
Lastly, the student recipient of the loan must attend or have graduated from an eligible education institution. Students who have yet to complete their degree programs must be enrolled in school at least half time; generally, this means completing six or more credit-hours per semester.
How can I Claim the Student Loan Interest Deduction?
After the tax year ends, your loan servicer will issue a Student Loan Interest Statement (Form 1098-E) for any loan on which you paid $600 or more in interest. If you paid less than $600 in interest on a loan, then you will need to contact the loan servicer to determine the exact interest expense that was incurred. (If your combined interest expenses across multiple loans exceeds $600, then you will need to request a Form 1098-E from each individual loan servicer.) Borrowers who are repaying multiple loans with different loan servicers may receive more than one Student Loan Interest Statement. The Student Loan Interest Deduction is an above-the-line tax deduction, which means that you are not required to itemize your student loan interest expenses in order to claim the deduction. The deduction is taken simply as a downward adjustment to your taxable income.
Need More Information?
You can utilize the IRS’s handy Interactive Tax Assistant tool to determine if you are eligible for the Student Loan Interest Deduction. The IRS also provides a Student Loan Interest Deduction Worksheet to help taxpayers calculate the student loan interest tax deduction for which they qualify.