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Tax Day: What Families Need to Know About Student Loan Interest Deductions

Photo by Olga DeLawrence on Unsplash

Since 1998, the number of Americans claiming the student loan interest deduction at tax time has more than tripled, from less than 4 million to more than 12 million. Yet Congress hasn’t increased the maximum deduction in almost 20 years, and fewer than one in three student loan borrowers claims it.

An analysis of more than than two decades of IRS data reveals some surprising facts about who benefits the most from the student loan interest deduction:

  • All told, Americans have deducted more than $165 billion in student loan interest payments at tax time, with the average deduction climbing from $460 to $1,089
  • Married couples filing joint returns represent only about one-third of all tax filers, but claim roughly half of the nearly $14 billion in deductions awarded each year
  • Millennials claim nearly two-thirds of deductions, but deductions awarded to taxpayers 55 and older are approaching $2 billion a year
  • Although the tax break is fairly well-targeted at the middle class, one-fifth of deductions go to families making $100,000 or more

Here’s what you need to know about the value of this “above-the-line” deduction to different borrowers, and how to claim it.

How the student loan interest deduction works

If you’re paying interest on student loan debt, federal or private, you may qualify to deduct up to $2,500 in student loan interest payments from your income and earnings. Depending on your tax bracket, the reduction in your adjusted gross income (AGI) can save you up to $550 on your tax bill, although the average savings is closer to $200.

The student loan interest deduction is an “above-the-line” adjustment, meaning you can claim it even if you don’t itemize your deductions. So even if you’re like most taxpayers and just take the standard deduction, the student loan interest deduction might still save you money.

If you’re single, the deduction starts phasing out if your 2019 adjusted income is above $70,000, and you can’t claim it at all if you make more than $85,000.

The 2019 limits for married couples are a little higher, with the phaseout starting at $140,000. Couples making more than $170,000 can’t claim the deduction at all.

The student loan interest deduction benefits the middle class

 

Deductions by income ($13.69B)

Deductions by income ($13.69B)No adjusted income 0.73%$1-$10,000 2.12%$10,000-$19,999 5.18%$20,000-$29,999 8.39%$30,000-$39,999 11.61%$40,000-$49,999 13.21%$50,000-$74,999 24.96%$75,000-$99,999 13.43%$100,000-$200,000 20.36%

The student loan interest deduction is targeted at the middle class, with nearly two-thirds (63.3%) of deductions claimed by taxpayers earning $30,000 to $99,999. Source: Credible analysis of IRS data.

Married couples claim half of all deductions

Married couples filing jointly account for only about a third (35.8%) of all tax returns, but represent close to half (45.7%) of all claims for the student loan interest deduction.

 



Not only are married couples filing joint returns more likely to claim the deduction — 10.5% did so in 2017, compared to 7.6% of singles, and 5.7% of heads of household — but they’re awarded larger deductions. Married couples claiming the student loan interest deduction were able to deduct $1,154 from their income, on average, compared to $1,067 for single taxpayers and $897 for heads of household.

Because married couples are more likely to file claims and are awarded larger deductions, they captured 48.4% of student loan interest deductions awarded in 2017, totaling $6.63 billion.

Married couples can only claim the student loan interest deduction if they file joint returns. That means in some cases, both members of a marriage may be paying down student loan debt.

That’s one explanation for the higher prevalence of claims and bigger deductions awarded to married couples. But higher income limits — $170,000 for married couples, versus $85,000 for other taxpayers — are another factor.

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