Why Student Loan Borrowers Could See a Larger Tax Bill This Year
Many student loan borrowers could face an unpleasant surprise on their tax bill this year; they may not be able to claim the student loan interest deduction. Roughly 12 million taxpayers take advantage of this tax break, which allows borrowers to subtract up to $2,500 a year in interest payments they have made on their private or federal student loans. This lowers a taxpayer’s gross income, and, consequently, their tax liability.
The student loan interest deduction is taken as an above the line deduction, meaning that filers do not need to itemize their taxes to qualify. This is particularly beneficial for taxpayers since a majority have taken the standard deduction after it was nearly doubled from the Tax Cuts & Jobs Act in 2017. However, not everyone is eligible to take the deduction; the deduction phases out based on your income. For single filers, the phase out begins for those making $70,000 or more and phases out completely for those who earn above $85,000. For couples, the phase out begins for those making $140,000 or more and phases out completely for those who earn above $170,000.
Taking the deduction is fairly simple. Your lender typically reports your interest payments to the IRS on a 1098-E and you claim the deduction on line 20 of schedule 1. The average savings that result from the deduction are $550.
The federal pause on student loan payments was first enacted by the CAREs Act in March 2020 as a result of financial hardships caused by the coronavirus pandemic. This pause was further extended twice by the previous administration, and most recently extended to September 30th, 2021 by the current administration. To date an estimated 37 million borrowers have put their student loans on pause. These payments are paused without interest accruing.
However, since individuals can only claim the deduction based on amounts actually paid, many filers will not get to the claim the deduction this year. Even those who kept up with their payments throughout the pandemic will likely not be able to claim the full deduction since interest on these loans has also been paused.
It is important to keep in mind that most federal student loans were paused on March 13th, 2020. Individuals can still claim the deduction on interest paid during the first few months of 2020. Additionally, if an individual owes student loan payments that never qualified for the government’s break, including the Federal Family Education Loan Program, they may still be able to fully deduct their interest payments.
For those who financially struggled during the pandemic, the student-loan payment pause provided far more relief than the tax break would have. Once payments resume, they can take advantage of the deduction in the following years.
Sources: https://www.cnbc.com/2021/03/26/student-loan-borrowers-could-have-a-higher-tax-bill-this-year-.html, https://www.thebalance.com/student-loan-interest-deduction-3193022, & https://www.nerdwallet.com/article/loans/student-loans/student-loan-covid-forbearance