Fewer borrowers will be able to claim the student loan interest deduction for 2022, with federal loan payments on hold for the duration of the year. But some people may still qualify.
Before the Covid pandemic, nearly 13 million taxpayers took advantage of the break, which allows borrowers to deduct up to $2,500 a year in interest payments they’ve made on their private or federal student loans.
However, since March 2020, the U.S. Department of Education has allowed most federal student loan borrowers to pause their monthly bills without interest accruing. As a result, most people with federal student loans haven’t made a payment since, and don’t qualify for the deduction.
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Still, some people may be able to claim the student loan interest deduction for 2022, said higher education expert Mark Kantrowitz.
If you owe student loans that haven’t been eligible for the government’s break, including commercially held Federal Family Education Loans (FFEL) or any private student loans, you may have made interest payments that can be deducted.
The best way to determine if you have potential interest to claim is to contact your loan servicer, said Betsy Mayotte, president of The Institute of Student Loan Advisors.
How the student loan interest deduction works
The student loan interest deduction lowers your adjusted gross income. The deduction is “above the line,” meaning you don’t need to itemize your taxes to qualify for it.
There are income phaseouts, however, and individuals who earned above $85,000 and couples who made more than $175,000 in 2022 are not eligible at all. Borrowers’ eligibility for the deduction may also be reduced if their employer made payments on their student loans as a work benefit, Mayotte added.
Your lender reports your interest payments over a certain amount to the IRS on a tax form called a 1098-E, and should provide you with a copy, too.
Depending on your tax bracket and how much interest you paid, the deduction could be worth up to $550 a year, Kantrowitz said.
Student loan forgiveness shouldn’t trigger a tax bill
Most recently, Biden administration officials have said student loan bills will resume 60 days after litigation over its forgiveness plan resolves or at the end of August — whichever comes sooner.
President Joe Biden rolled out his sweeping student loan forgiveness plan in August, which would cancel up to $20,000 of debt for millions of Americans. His plan has since faced a number of legal challenges and is currently on hold.
At the end of February, the Supreme Court will hear oral arguments over the president’s plan and determine its fate.
If the Biden administration is able to go ahead with forgiveness, borrowers shouldn’t get hit with a tax bill next spring, although at times canceled debt is considered taxable income.
That’s because The American Rescue Plan of 2021 made student loan forgiveness tax-free through 2025 — and the law covers Biden‘s forgiveness, too, according to a fact sheet from the White House.
However, there’s a chance you’ll have to pay state taxes on any forgiven debt.