If you have federal student loan debt, you are probably aware of the interest-free payment pause that has been in effect since March 2020. However, after nine extensions by both the Trump and Biden administrations, the more than three-year pause is coming to an end on September 1. These loans will once again begin to accrue interest, with payments resuming in October 2023. While many taxpayers were hoping the legal proceedings surrounding Bidens $20,000 student loan debt cancelation would be resolved and their debts forgiven, for now, borrowers will once again be making their monthly payments.
This news is not all bad, as borrowers may once again be able to deduct student loan interest on their tax returns.
What’s the deduction?
If you’re eligible, the deduction is the lesser of $2,500 or the actual interest paid during the year. The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Post-graduate programs may also qualify. For example, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or healthcare facility offering post-graduate training could also qualify.
Do I qualify?
For 2023, the deduction is phased out for single taxpayers with adjusted gross income (AGI) between $75,000 and $90,000 ($155,000 and $185,000 for married couples filing jointly). The deduction is unavailable for single taxpayers with an AGI of more than $90,000 ($185,000 for married couples filing jointly).
If you’re a married taxpayer, you must file jointly to claim this deduction. Married filing separate status taxpayers do not qualify for the deduction.
The deduction is commonly referred to as an “above the line” deduction, meaning you don’t need to itemize your deductions to benefit, assuming you meet the other requirements.
No deduction is allowed for taxpayers who can be claimed as a dependent on another tax return. For example, let’s say a parent is paying for the college education of a child whom the parent is claiming as a dependent. In this case, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any of the interest the child may pay on a student loan. The child will be able to deduct interest that’s paid in later years when he or she is no longer a dependent.
Additional rules to consider
The interest paid must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.
Taxpayers must keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenses including books, equipment, fees, and transportation.
Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.