The only student loan tax deduction is for the interest you pay per year on the loan. Unfortunately, you cannot the principle payments and the interest deduction is phased out based on income levels.
Additionally, you can only deduct the interest if:
- You paid interest on a qualified student loan in the tax year. Your school will issue you a Form 1098-E;
- You are legally obligated to pay interest on a qualified student loan
- Your filing status is not married filing separately;
- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return, or;
- You are filing single and your income is under $70,000. Your interest deduction phases out between:
- $70,000 – $85,000 ($140,000 & $170,000 Married Filing Jointly)
- If your income falls above those limit, you cannot deduct student loan interest
There is some temporary relief with the Coronavirus Aid, Relief and Economic Security Act (CARES). The final extension on the pause on Federal student loan repayments, interest, and collection thereof is now January 31, 2022.
- Loan payments are suspended;
- You have 0% interest rate and;
- Collection on defaulted loans is stopped.
After that, it’s back to normal. The other relief is from the American Rescue Plan. This provides relief to those students who have government and federal student loans. It allows students whose loans have been forgiven to exclude (leave out) the discharged debt from their taxable income for the tax years 2021-2025. This is a big thing and eliminates what could otherwise be a huge tax burden.
Also, if you used your credit card to pay for qualified educational expenses, you might be able to write-off the interest on your taxes. It has to be exclusively for school-related needs. If not, you cannot deduct it.
If you are on an income-driven student loan forgiveness program, you may owe a large tax after the loan is forgiven. This is because the IRS might consider the forgiven debt to be income.
If you consolidate multiple student loans that you have, your loan interest is most likely still deductible on your taxes.
Defaulting on your student loans is not a good idea. The IRS can garnish your tax refund until your debt is paid in full. They can garnish other tax benefits, including Social Security.
**Note your university or college will send you a Form 1098-T showing the amount of tuition you paid, tuition- related expenses, and any grants or scholarships applied.
