Once you’ve started repaying your student loans, you’ll understand how important it is to save money wherever possible. At tax time, you may be eligible to claim a deduction on interest you’ve paid on your student loan. Worth up to $2,500 off your taxable income, this deduction can really help students and graduates pinch pennies when possible. Taxpayers in the 15% bracket may receive a minimum of $375 in student loan interest deduction when they file their return.
Other Educational Deductions and Credits
As with any loan, you’ll generally pay back more than the amount you originally borrowed, due to interest. The student loan interest deduction is available to taxpayers with an AGI under $80,000 annually, and directly relates to how much you’ve paid in interest. Those who fall between $65,000 and $80,000 are subject to a reduced interest amount.
Parents may also deduct interest on loans they’ve taken to pay for their child’s education. Be aware though, if you took a loan in your name, and your parents claim you as a dependent, you sacrifice your claim to the deduction.
You don’t have to have already graduated to claim the deduction either, as students who have started making payments while in school are also eligible, if they are paying interest.
There are additional education deductions for students while they are in school. For example, students can claim up to $4,000 in tuition and fees or claim one of two education credits: The American Opportunity Tax Credit or the Lifetime Learning Credit. These are worth up to $2,500 and $2,000 respectively, each with their own requirements and rules.
After determining all your eligibility and income, you should claim the credit that will be the most beneficial to your taxes. Generally, credits offer the best benefit in comparison to deductions, as the latter reduces your taxable income. Credits decrease the amount you pay in taxes.