Why some student loan borrowers could face a higher tax bill this year

Student loan borrowers may see more relief still in the pandemic.
ViT Postman | iStock | Getty Images

Many people with federal student loans won’t be able to claim a popular deduction on their taxes this year.

Around 12 million taxpayers take advantage of the break known as the student loan interest deduction, which allows borrowers to subtract up to $2,500 a year in interest payments they’ve made on their private or federal student loans from their gross income, lowering their tax liability.

The student loan interest deduction is “above-the-line,” which means you don’t need to itemize your taxes to qualify for it. There are income phase-outs, though, and individuals who earned above $85,000 and couples who made more than $170,000 in 2020 are not eligible at all.

More from Personal Finance:
About 127 million $1,400 stimulus checks have been sent
Using tax-deferred savings can help you get that $1,400 stimulus check
How to make sure you don’t miss $1,400 stimulus checks in the mail

Your lender is supposed to report your interest payments to the IRS on a tax form called a 1098-E, as well as provide you with a copy. You claim the deduction on line 20 of Schedule 1.

In most years, you can save up to $550 a year by doing so.

This year will be different, though.  

Since March 2020, the government has given most federal student loan borrowers the chance to pause their monthly bills without interest accruing. President Joe Biden has extended that break until the end of September.

No payments will mean no tax break for many.

“You can claim the student loan interest deduction based only on amounts actually paid,” said higher education expert Mark Kantrowitz.

Because the interest on most federal student loans has been paused, even if you’ve continued making payments during the pandemic you likely still won’t be able to claim the full deduction because your money has been going directly to your debt’s principal. The break is only for payments to interest.

Still, not all is lost. And some people will still be eligible.

The payment pause and interest waiver for most federal student loan borrowers didn’t begin until March 13, 2020. That means that you may have made payments to your loan’s interest for two or three months of the year that you can still deduct from your gross income.

In addition, if you owe student loans that haven’t been eligible for the government’s break, including Federal Family Education Loan Program or any private loans, you may have made interest payments that can be deducted.

Of course, for those struggling during the pandemic, the loss of the tax break will mean little compared to the relief they’ve gotten from not having to pay their student loans. The average bill is $400 a month.

For others, it’ll just mean a higher tax bill.

“It is an example of how the government gives with one hand while taking back with the other,” Kantrowitz said.

Leave a Reply

Your email address will not be published. Required fields are marked *