Student Loan Update as Payees Could Get $2,500 Tax Deduction

There's some good news for Americans who have been making repayments on their student loans: they may be able to deduct up to $2,500 from their taxable income.

The student loan interest deduction allows taxpayers to deduct "the lesser of $2,500 or the amount of interest you actually paid" during the year, according to the Internal Revenue Service.

You can claim the deduction if: you paid interest on a qualified student loan in the 2023 tax year; you are legally obligated to pay interest on a qualified student loan; your filing status isn't married filing separately; your modified adjusted gross income (MAGI) is less than a specified amount which is set annually; and neither you nor your spouse, if filing jointly, were claimed as dependents on someone else's return.

For 2023, the MAGI phase-out begins at $75,000 for single filers and you can't claim the deduction if it is more than $90,000. The phase-out begins at $155,000 for joint filers, and in that case, you can't claim the deduction if your MAGI is $185,000 or more.

The deduction applies to all student loans, not just federal loans, that a person took out for themselves, their spouse or someone who was their dependent when they took out the loan.

The deduction can be claimed as an adjustment to income so you do not need to itemize your deductions. For more information about claiming the deduction, visit the IRS' website.

The benefit could help the millions of borrowers who had to start repaying their student loans in October following a three-year pause due to the coronavirus pandemic.

It came after the Supreme Court rejected President Joe Biden's plan to wipe away $400 billion in student loan debt last summer. That plan would have canceled up to $20,000 in federal student loans for those with annual incomes below $125,000 or couples with incomes below $250,000.

The Biden administration is now working towards a new proposal for widespread student loan cancellation.

The plan is not finalized, but the Education Department in late October released a draft of a proposal that hopes to provide relief to certain groups of borrowers.

The department said it wants to cancel some or all student debt for: borrowers whose balances exceed what they originally owed; those who have loans that entered repayment 25 or more years ago; those who used loans to attend career-training programs that created "unreasonable" debt loads or provided insufficient earnings; and those who are eligible for other loan forgiveness programs but did not apply. The department said a fifth group was also being discussed: those who are "experiencing financial hardship that the current student loan system does not currently adequately address."