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Deduction of Interest Paid on Student Loans


Taxpayers may deduct interest paid on student loans from federal adjusted gross income. This deduction is not limited to taxpayers who claim itemized deductions. The maximum deduction is $2,500 per year. The loan proceeds must have been used to pay for the qualified higher education expenses (tuition and fees required for enrollment, room and board, books, supplies, and equipment, and other necessary expenses, including transportation) of a student who was enrolled at least half-time. A taxpayer may deduct interest paid on loans used for their own qualified higher education expenses, or for the expenses of a dependent. An individual who is claimed as a dependent on someone else's return may not claim the deduction.

Tax benefits

The deduction for student loan interest results in a reduction in both federal and state income taxes for taxpayers who have regular tax liability. The amount of the reduction depends on the taxpayer's marginal rate, and if the taxpayer is eligible for any credits or is subject to the alternative minimum tax (AMT).

A taxpayer claiming the maximum deduction of $2,500 would, due to income-based phaseout of the deduction, typically experience the greatest federal and state tax benefits with income in the 25 percent federal bracket and in the 7.05 percent state bracket, resulting in tax benefits of $625 at the federal level and $176 at the state level.

A taxpayer with a $2,500 deduction who has taxable income only in the bottom federal and state brackets (in tax year 2016, 10 percent and 5.35 percent), is not eligible for any credits, and is not subject to the AMT, will experience a tax reduction of $250 at the federal level and $134 at the state level. Taxpayers with no regular tax liability do not benefit from the deduction.

Interaction with other programs

Taxpayers may claim the American Opportunity credit or the Lifetime Learning credit for expenses paid for with student loans. In determining if the student loan was used for qualifying higher education expenses, the taxpayer must subtract from total qualifying expenses any U.S. savings bond interest deducted under the Education Savings Bond program, and any withdrawals from a Coverdell ESA and distributions from a qualified tuition program (QTP) that were used to pay for higher education expenses and excluded from taxable income.


The student loan interest deduction is subject to an income-based phaseout. For tax year 2016, the deduction is phased out at the federal and state levels for married taxpayers with modified adjusted gross income (AGI) between $130,000 and $160,000, and for single filers and heads of household with modified AGI between $65,000 and $80,000.

The phaseout ranges are adjusted annually for inflation at both the federal and state levels. Taxpayers with modified adjusted gross income above the phase-out may not deduct student loan interest. Modified adjusted gross income equals adjusted gross income before the deduction for student loan interest, plus foreign earned income, housing costs of individuals living abroad, and income from sources within Puerto Rico and U.S. territories.

March 2016