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How student loan interest can lower your taxes

Alyssa Pry
Personal Finance Reporter

Paying off your student loans is a hard slog that can take years, but it can come with a nice perk: a tax deduction.

“No one likes having student loans, but at least one perk of them is the interest that you pay is tax deductible,” said Nick Holeman, a certified financial planner with Betterment.com.

People who have paid up to $2,500 in interest payments over the last year are eligible for the student loan interest deduction, which will lower your taxable income.

“The student loan tax deduction is a great deduction, but you only get to claim it for interest you actually paid throughout the year,” he said. If you owe interest, or have fallen behind and missed payments, you won’t be able to claim the deduction.

For those who have stayed on top of their payments, their lender will send Form 1098-E, which will show you how much you’ve paid in interest over the tax year. You can then input that form into your tax software, or bring it to your accountant, to claim the deduction.

With the maximum deduction capped at $2,500, the most you will get back is $625. This number depends on your tax bracket, Holeman explained. There is also an adjusted gross income limit of $80,000, or $160,000 if filing jointly.  

For someone who claims the maximum deduction of $2,500, if you’re in the 25% tax bracket, you would save 25% of your deduction, which is $625.

You can use a student loan deduction interest calculator to determine how much you can expect to get back.

Holeman advised thinking smartly about what to do with your tax refund, and encouraged people to put it toward paying off loans, adding to an emergency fund, or investing in a retirement account like a 401(k) or Roth IRA.

But don’t think every penny needs to be put to good use, Holeman says.

It’s important to enjoy yourself a little bit, so maybe save three-quarters of it and enjoy the other one quarter of it,” he said.

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