Instead, they can claim both the student loan interest deduction and the standard deduction

The student loan interest deduction has allowed borrowers to deduct up to $2,500 a year in interest paid on federal and private student loans on their federal income tax returns since the 1998 tax year.

The student loan interest deduction is taken as an above-the-line exclusion from income, so taxpayers do not have to itemize to claim the deduction.

Financial Impact

Since the student loan interest deduction is an above-the-line exclusion from income, it reduces the taxpayer’s adjusted gross income (AGI). The reduction in AGI can yield other benefits, such as qualifying the taxpayer for other tax benefits and reducing susceptibility to the alternative minimum tax (AMT).

According to IRS statistics of income, the average student loan interest deduction is about $1,000, saving about $250 per taxpayer. Since the student loan interest deduction phases out in the 25% tax bracket, the maximum reduction in tax liability for a borrower claiming the full $2,500 deduction is $625.

Eligibility

Taxpayers can claim the student loan interest deduction only if they are legally obligated to pay the interest as a borrower or cosigner of the federal or private student loan. Voluntary payments by others count as though they were made by the borrower.

If the borrower could have been claimed as a dependent on someone else’s federal income tax return, the borrower cannot claim the student loan interest deduction. Read more