TL;DR
Did you pay any student loan interest during 2018? If so, you may be able to deduct this from your taxes and save some money. If you paid any interest, and your income (specifically your Modified Adjusted Gross Income) is less than $80,000 (single) or $165,000 (married), you can deduct at least a portion of your student loan interest paid. You must have some income in 2018 from which to deduct the student loan interest.
The maximum amount of the deduction is $2500. How much this saves you in taxes depends on your federal and state tax bracket. But regardless, if you owe any taxes in 2018, and you paid any interest, you can likely reduce your total taxes paid!
Loan Consolidation
If you are an intern and recent medical school graduate who followed our advice regarding your student loans, you would have consolidated your student loans immediately upon graduation and waived the grace period, and in addition selected an income-driven payment plan. This would have qualified you to have loan payments of “$0”, and these loan “payments” count toward Public Service Loan Forgiveness.
But you may not have realized that with consolidation, your old loans (principal plus interest) are “paid off” with a new loan. So in the process, you effectively paid interest on these loans. And did you know that you can take a tax deduction for student loan interest paid? As long as your income for 2018 is less than the threshold indicated above in the summary, you’ll get a tax break for student loan interest paid, even though you didn’t actually make a payment toward your loans.
Our References
The relevant text or guidance from the IRS is found in Publication 970 “Tax Benefits for Education”: "Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments." You can consider interest paid via loan consolidation as a form of voluntary interest payment.
If you have more than $600 of student loan interest paid, you should receive a form “1098-E” from your previous lender which reports this. Here is a sample 1098-E for you to browse showing the student loan interest "received by the lender" in response to a loan consolidation. Don’t worry that our sample uses a 2017 form rather than 2018. They are the same. In general, if you enter this into your tax software (or provide this to your tax preparer), you’ll get the deduction (if you are otherwise eligible).
Extra Help
Here is an “Interactive Tax Assistant” from the IRS which will help you decide if you can deduct your student loan interest paid.
And as always, you need to do your own homework to figure out if what you are reading here is correct!
Please contact us with any questions! And please share this post with your colleagues on Facebook, via email, etc.
Subscribe to Receive Updates
Or if you already get way too many emails, use the link below to subscribe to our RSS Feed: