When you think about student loans, the word “benefit” probably never comes to mind. I mean, come on, student loans suck. How can something as horrible as student loans possibly have any kind of benefit?
Surprisingly, you would be wrong. Though student loans are awful in nearly every way imaginable, they do come with one nice benefit: The student loan interest deduction.
The Student Loan Interest Deduction
In short, the student loan interest deduction allows you to lower the amount of federal income tax you owe each year. It’s a bit more complicated than that (more below) but that certainly is a nice advantage to having student loans.
If you are a single filer and have a modified adjusted gross income (MAGI) of $80,000 or less, or are married and filing jointly with an income of $160,000 or less, and have paid student loan interest over the course of the year then you are able to deduct that interest on your tax return. In fact, you can deduct up to $2,500 in student loan interest. The one caveat here is that you, duh, whatever you deduct must match the amount of student loan interest that you’ve paid over the course of the year.
With an average starting salary in 2015 of just over $50,000 for college grads, that means that most graduates will qualify for the deduction. If you pay taxes at a rate of 25 percent, this deduction will save you a maximum of $625 each year; if you pay at a rate of 15 percent, the deduction can save you a maximum of $375 per year.
Unfortunately, if you are married and filing jointly, that doesn’t mean that you can double up on the tax deduction: You can deduct only $2,500, whether you are filing singly or jointly. If you’ve got cold feet about taking the next step in your relationship, this may be just the excuse you’re looking for!
When you’re organizing your tax forms prior to filing, you should keep an eye out for a Form 1098-E from your student loan servicer. This will detail the amount of interest that you have paid over the course of the year. If you didn’t pay at least $600 in interest over the course of the year, you may not receive a form from your servicer—but that doesn’t mean you can’t deduct the interest that you did pay. You’ll just have to go back to your records to determine exactly how much interest you did pay.
And this benefit isn’t just limited to student borrowers. If you are a parent who has taken out student loans for one or more of your children, you can also claim this deduction (though it remains a maximum of $2,500 no matter how many students you have taken out loans for).
Don’t Forget Your Deduction!
$375 to $625 a year might not seem like a lot of money to people who are fully established in their careers, but it can be a real windfall for recent college grads. But really, regardless of the stage in your career, if you qualify for the student loan interest deduction, you should take it. If you don’t, you are quite literally throwing money away.
Okay, so now you know about the deduction. But what if you didn’t know about last year and filed your returns? Luckily, you may be able to recoup the lost money by submitting Form 1040X (Amended U.S. Individual Income Tax Return) to the IRS. This form is used to correct errors to your tax return.
If the correction will get you a tax refund, then you have up to three years after the filing due sate, or two years after you’ve paid taxes to submit the form. Death and taxes may be inevitable, but at least your taxes can be corrected if you’ve made a mistake!
Just think of how you could be using that money—say, paying down some of your student loan balance so that you owe less in interest over the life of your loan. Smart move!