How Does the Student Loan Interest Deduction Work?

Is Student Loan Interest Tax Deductible?

The U.S. tax code allows you to deduct up to $2,500 in student loan interest each year, depending on how much interest you paid and your modified adjusted gross income (MAGI).

Your student loan servicer or lender will send you Form 1098-E if you paid $600 or more in interest during the year. This form shows exactly how much interest you paid, which determines the amount you can deduct on your tax return.

The deduction is taken as an adjustment to income, which means you benefit from it even if you take the standard deduction instead of itemizing.

Keep in mind this is a tax deduction, not a tax credit. A deduction reduces your taxable income, which in turn lowers your tax bill. The actual tax savings depends on your tax bracket and effective tax rate.

Learn more: Tax Credit vs. Tax Deduction: What's the Difference?

Eligibility Requirements for the Deduction

To qualify for the student loan interest deduction, you'll need to meet the following criteria:

• You paid interest on a qualified student loan during the tax year.
• You're legally obligated to pay the interest on the loan.
• Your filing status isn't married filing separately.
• Neither you nor your spouse (if filing jointly) can be claimed as a dependent on someone else's tax return.

It's also important to note that the deduction begins to phase out at higher income levels and becomes completely unavailable once you exceed the maximum threshold. Here are the MAGI limits for the 2025 tax year (filing in 2026):

Source: IRS

What Qualifies as a Student Loan?

A qualified student loan is one that was taken out to pay for qualified higher education expenses. These expenses must have been:

• For you, your spouse or a dependent
• Paid or incurred within a reasonable period before or after you took out the loan
• For education provided during an academic period for an eligible student

Qualified expenses include tuition, fees, room and board, books, supplies, equipment and other necessary costs associated with attending an eligible institution. Both federal student loans and private student loans can qualify, as can personal loans in some instances—though the latter option is often more expensive and doesn't provide the same benefits as student loans.

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Additional Tax Breaks for Education

Beyond the student loan interest deduction, several other tax benefits can help offset the cost of higher education. If you're currently enrolled in school or paying education expenses for a spouse or dependent, you may qualify for one or more of these credits and savings plans.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit offers more generous tax savings than the student loan interest deduction if you're still in the first four years of undergraduate education. This credit can reduce your tax bill by up to $2,500 per eligible student each year.

The AOTC provides 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000. What makes this credit especially valuable is that it's partially refundable—if the credit reduces your tax liability to zero, you can receive up to 40% of any remaining credit (up to $1,000) as a tax refund.

Eligibility requirements for AOTC include the following:

• The student must be pursuing a degree or recognized educational credential.
• The student must be enrolled at least half time for at least one academic period during the tax year.
• The student cannot have completed the first four years of postsecondary education before the beginning of the tax year.
• You cannot have claimed the AOTC (or the former Hope Credit) for the same student for more than four tax years.
• The student cannot have a felony drug conviction.

For the 2025 tax year, the full credit is available if your MAGI is $80,000 or less ($160,000 or less for married filing jointly). The credit phases out if your MAGI is between $80,000 and $90,000 for single filers (between $160,000 and $180,000 for joint filers). You cannot claim the credit if your MAGI exceeds $90,000 ($180,000 for joint filers).

Lifetime Learning Credit (LLC)

If you've exhausted your four years of AOTC eligibility or you're pursuing graduate studies, professional courses or other continuing education, the Lifetime Learning Credit can provide tax savings.

The LLC offers a credit of up to $2,000 per tax return (not per student) for qualified education expenses. It's calculated as 20% of the first $10,000 you spend on qualifying expenses. Unlike the AOTC, this credit is not refundable, which means it can only reduce your tax liability to zero but won't result in a refund.

Here are some other key differences between the LLC and the AOTC:

• There's no limit on the number of years you can claim the LLC.
• The LLC is available for undergraduate, graduate and professional degree courses.
• The student doesn't need to be pursuing a degree or enrolled at least half time.
• The credit applies to expenses for one or more students on a single return, but the maximum credit remains $2,000 per return.

That said, the LLC has the same income limits as the AOTC.

529 Plan

If you're saving for future education expenses—whether for yourself, your children or another family member—a 529 plan is one of the most tax-efficient ways to do it. These state-sponsored savings plans offer significant tax advantages that can help your education savings grow faster.

The money you save or invest in a 529 plan grows tax free and can be withdrawn on a tax-free basis, as long as you use the funds for qualified educational expenses.

While 529 plan contributions aren't deductible on your federal return, more than 30 states offer a state income tax deduction or credit for contributions to a 529 plan, but only if you contribute to your own state's plan.

An additional nine states, including Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania, offer tax parity, meaning you can claim a deduction for contributions to any state's 529 plan. The type of tax benefit and amount vary by state.

Learn more: How Much Should You Save for Your Child's College?

How to Pay Off Your Student Loans Faster

Getting a tax break on your student loan interest provides some savings, but paying off your loans faster and reducing the total interest you pay over the life of the loan will save you even more money in the long run.

Consider these strategies to accelerate your student loan payoff:

• Make extra payments. Even small additional payments can significantly reduce your total interest. Apply extra payments directly to your principal balance to maximize the impact.
• Pay biweekly instead of monthly. Split your monthly payment in half and pay every two weeks. This results in 26 half-payments per year, which equals 13 full monthly payments instead of 12.
• Make interest payments while in school. If you have unsubsidized federal loans or private loans, interest accrues while you're in school. Making interest-only payments during this time prevents interest capitalization and keeps your loan balance from growing.
• Set up automatic payments. Many lenders offer a 0.25% interest rate discount when you enroll in automatic payments. This small reduction can add up over time, and automatic payments ensure you never miss a due date.
• Apply windfalls to your loans. Use tax refunds, work bonuses or other unexpected money to make lump-sum payments on your student loans.
• Consider refinancing. If you have good credit and a steady income, refinancing your student loans at a lower interest rate could save you money and help you pay off your debt faster. However, be cautious about refinancing federal loans into private loans, as you'll lose federal protections like income-driven repayment plans and potential forgiveness programs.
• Increase payments as your income grows. As you receive raises or pay off other debts, redirect that money toward your student loans rather than lifestyle inflation.
• Use the debt avalanche method. If you have multiple student loans, consider the debt avalanche strategy, which focuses your energy on paying extra toward the loan with the highest interest rate while making minimum payments on the others. Once that's paid off, move to the next highest rate.

Remember that there's no one-size-fits-all approach to paying down student loan debt. Choose strategies that align with your financial situation, goals and other obligations like building an emergency fund or saving for retirement.

Pay Student Loans on Time to Build Credit

If you're a recent college graduate, you may not have had time to start building a credit history. Making your student loan payments on time every month can help you build a positive payment history, which is the most important factor in your FICO^® Score^Θ.

Even if you've been out of school for a while or you're a parent of a student, on-time payments will make it easier for you to build and maintain a good credit history.

Check your credit scores throughout the repayment process to keep track of your progress, and look for opportunities to address potential concerns as they arise.