A Student Loan Borrower’s Guide to Tax Season 2021: How Will the Student Loan Payment Freeze Impact Your Interest Deduction?

Following the economic chaos of 2020, taxpayers may have questions on how last year’s relief legislation may impact their returns.

As confusing as filing taxes can be during “normal” years, this year’s tax season may be especially complicated. Following the economic chaos of 2020, taxpayers may have questions on how last year’s relief legislation may impact their returns.

Many borrowers usually receive some tax relief through the student loan interest deduction, which allows them to deduct the amount they paid on interest throughout the year. For some, this can shave a sizable chunk off their taxable income, reducing the total amount owed.

But this year things are a little different — for most of 2020, borrowers with federal student loans were not required to make payments, which means they may have paid less in interest than in previous years.

This leaves one big question on our minds this tax season: will borrowers still be eligible to claim the student loan interest deduction this year?

 

What is the student loan interest deduction?

If you’ve filed as a student loan borrower before, you may have taken advantage of the student loan interest deduction.

This tax break allows borrowers to deduct the amount you paid on student loan interest throughout the year (up to a maximum of $2,500) if you meet the following qualifications:

  • You paid interest on a qualifying student loan in the tax year 2020. Your loans are considered a “qualifying student loan” if you took it out to pay for education expenses for yourself, your spouse, or a dependent. Qualifying loans can cover tuition, room and board, textbooks, transportation, or any other necessary expenses.
  • You’re legally obligated to pay interest on a qualified student loan. Most student loans fall into this category.
  • Your filing status isn’t married filing separately. 
  • Your modified adjusted gross income (MAGI) is less than a specified amount which is set annually. This tax season, you can deduct up to the full amount of $2500 if you make up to $70,000 (or $140,000 if you’re married filing jointly). If your income was between $70,000 and $85,000 (or $170,000 married filing jointly) then the amount you can deduct will be prorated. If you made more than that threshold, you do not qualify for the deduction.
  • Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else’s return.

But after last year’s relief legislation addressing student loans, many borrowers may see some changes to their net deduction.

Last March the CARES Act put a pause on student loan payments and froze interest growth. Borrowers were not obligated to make payments on federal student loans through the end of 2020. This leaves only three months out of the year that payments continued as usual — and after that, it gets tricky.

 

How will the student loan payment freeze affect your deduction?

The short answer is that it depends on whether you chose to take advantage of the payment freeze.

Because the allotted deduction is based on how much each borrower paid towards interest on their loans, those who opted not to make payments during the moratorium period may not be eligible to claim a deduction as substantial as in years past.

But that doesn’t mean that your deduction is completely lost. Let’s break this down further.

If you did not make any payments during the student loan payment freeze…

This deduction will total the interest you paid from January through March. This means your net deduction may be smaller than it was in previous years.

If you continued making payments during the student loan payment freeze…

Since you probably paid an amount similar to previous years, your deduction may not be impacted — but it’s best to double check with a tax professional to make sure.

If you are unsure of exactly how much you paid…

Not to worry. If you paid $600 or more in interest, your loan provider will automatically send you Form 1098-E, also known as your Student Loan Interest Statement. This form will provide more detailed information on your payments from last year.

Still don’t know whether you qualify? Check out the IRS’s Interactive Tax Assistant — it takes about 10 minutes to complete and can help determine whether you can claim the deduction.

After the turbulence of the last year, many borrowers will need professional guidance to be sure their tax returns accurately reflect their financial status and payment activity. Regardless of your situation, it’s best to consult a professional on your tax situation.

Questions? Reach out to our team of student loan experts at [email protected]

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