Once you graduate, if you opted to finance your education, you’ll be responsible for paying back any student loans. While you won’t see a direct tax break in accordance with student loan repayment, you can deduct interest that you’ve paid, up to $2,500.
Student loan interest is deducted through Form 1040, on line 33. Using electronic filing software is the simplest way to determine the deduction, as entering the interest amount is all you have to do, and the software will calculate the deduction for you.
In order to deduct interest on a student loan, the following must all be true:
You paid interest on a qualifying student loan during the year
You are not married, filing separately
You must have an adjusted gross income of less than $65,000 if using status Single, Head of Household, or Qualifying Widow(er)
No other taxpayer claims you as a dependent on their return
Unlike previous rules, which required you to be fully responsible for the debt in order to claim the deduction, you are currently able to deduct interest even if your parents pay back the loan. However, you still aren’t eligible to be a dependent.
That stated, the deduction only qualifies for the person who took out the student loan. This means that your parents are able to claim the deduction if the loan is in their name.
Taxpayers who pay their student loans using an IBR, ICR, or PAYE repayment plan should be extra careful when filing their tax returns. The tax filing status you chose can affect your repayment plan.
Married taxpayers should determine whether filing a return with their spouse, using “married, filing jointly,” or keeping their income separate by filing “married, filing separately” will alter their monthly payments. Opting for one filing status instead of the other may make your payments a little less expensive each month.
Some monthly student loan payment options, such as income-based repayment, are determined depending on your current household income and family size. This option usually offers lower monthly payments than a Standard repayment option. Income driven repayment usually varies between 10% and 20% of discretionary income. Discretionary income is calculated once your basic living expenses, such as rent and utilities are deducted. The loan holder will review your repayment plan each year and re-determine the appropriate monthly payment, depending on your tax return.
Examples of income driven repayment plans:
Pay as You Earn Plan
Income Contingent Plan
Income Based Plan
Your loan financer will set your monthly payment amounts based on the information obtained from your tax return. The important factors in determining your payment amount are your income, family size, and current debt amounts.
Filing your taxes using the status “married, filing separately”, means your loan provider will only consider the income that you earn. Your spouse’s income is only used to determine your monthly payments if you file a joint return. If you earn less than your spouse, filing a separate tax return can significantly lower your monthly payments on an income-based repayment plan.
A married couple has two children. One spouse makes $50,000 annually, with no student loan debt. The other spouse makes $25,000 per year, with debt of $60,000 in student loans being repaid through an Income Contingent Repayment program. If the student spouse files a separate tax return, their payment can be a little as $25 each month. By filing a joint return, the monthly payment rises to approximately $600