Student Loan Interest Deductions & Tax Credits

What are the AGI requirements for student loan interest deductions?

With lower employment rates, education-related expenses have proven to be an issue for students and recent graduates who are either seeking work or who are just getting started in their professional careers. There are, however, several options available for current and former students that can help to diminish overall financial burdens through student loan deductions. One such opportunity allows students to deduct loan interest from a loan or series of federally-funded college loans for qualifying students and is available on an income-adjusted basis.

In order to qualify for this tax deduction, the IRS has developed the following criteria: tax payers must have first paid interest on the loan(s) for the former year in order to be eligible. Married couples seeking this deduction should have filed jointly on their income tax returns instead of employing the status of "married filing separately." Also, if married couples are filing a joint return, it is not permissible for them to be listed as dependents on another party's return. For example, graduates cannot prove eligible for the student loan deduction if their parents are listing them under dependent status. Additionally, a person's modified adjusted gross income should be lower than an annual set amount. Eligible individuals will be sent a form, the 1098-E, if $600 or more of student loan interest has been paid annually.

A graduate must have a qualified student loan (or loans), meaning that this loan was strictly designated for the purpose of academic funding and for no other uses. In other words, "payday loans" and other such alternative funding sources are ineligible. Additionally, it should be noted that in order to qualify for this tax deduction, individuals should have paid the interest on the college loan(s) during the tax year.

The American Opportunity Tax Credit

The American Opportunity Tax Credit benefits many college and trade school students. Learners need to attend classes half time or more and stay enrolled a minimum of one semester, quarter or similar term. They must also seek a specific degree or certificate.

Eligible students have adjusted gross earnings of no more than $90,000 and receive the full credit if their modified adjusted gross income is $80,000 or less. If a person is married and files jointly, the yearly limit doubles. Most tax payers use adjusted gross income figures from Form 1040. However, people with foreign income or housing expenses might need to recalculate this amount using Publication 970.

Learners may request the credit a maximum of four times. They can't claim it while earning master's degrees or attending unaccredited schools. The Internal Revenue Service also disqualifies students who were convicted of drug-related felonies during or before the relevant tax year.

In addition to this tax deduction, there are two credits also available for eligible students who are either in school or for those who are paying for a student's education-related expenses. The American Opportunity Tax Credit exists for current students who are attending school at least half of a full-time academic load. This is available for up to $2500 per applicable tax return.

Taking Advantage of the Lifetime Learning Credit

The Lifetime Learning Credit is a credit of up to $2,000 per tax return of any student in an undergraduate, graduate, or professional degree course. Unlike the American Opportunity, which is only allowed to be claimed for up to four tax years, this credit carries an unlimited time frame for access


A taxpayer can claim the credit if the taxpayer, the taxpayer's dependent, or a third party pays higher education expenses for an "eligible student" at an "eligible educational institution," but only if the eligible student is the taxpayer, the taxpayer's spouse, or a dependent listed on the taxpayer's return.

An "eligible educational institution" is any post-secondary education institution that is eligible to participate in the U.S. Department of Education's student aid program. Educational institutions (including colleges, universities and vocational schools) that are eligible to participate in the student aid program are listed on the U.S. Federal Student Aid Code List.

This credit is equal to 20% of the first $10,000 of "qualified education expenses" (defined below) but cannot exceed $2,000 per return. It is non-refundable, meaning that the taxpayer will not receive any unused portion of the credit back as a refund if the credit exceeds the taxpayer's tax liability.

A taxpayer can claim the full credit if the taxpayer's modified adjusted gross income is $59,000 or less ($118,000 or less if the taxpayer is married and filing jointly). A taxpayer whose modified adjusted gross income exceeds $69,000 ($138,000 if married and filing jointly) cannot claim the credit.

Claiming the Student Tax Credit

In most cases, a student will receive a 1098-T, Tuition Statement, from his or her educational institution by January 31. The form will show amounts received (box 1) or billed (box 2) during the year.

To be eligible for this credit, expenses must be "qualified education expenses." These are amounts paid for tuition or fees (including student activity fees) that are required for enrollment or attendance. Not all expenses qualify. Amounts paid for room and board, insurance, medical expenses, and transportation are not qualified education expenses. Amounts paid for sports, games, hobbies, or non-credit courses also do not qualify unless they are paid for a course designed to give the student job skills or improve the student's existing job skills.

The Hope Scholarship Program was Expanded

The predecessor to this tax credit, the Hope Scholarship, covered the first two years of post-secondary education. For 2020-2021 it will pay a maximum of $7,680 for two semesters of enrollment in 15 credits per term. It was expanded and renamed the American Opportunity Tax Credit and now includes the first four years. The maximum credit amount was raised. Up to 40 percent of the credit is refundable, which means you can get a refund even if you do not owe taxes.

You can claim the credit if you pay eligible expenses for yourself or another qualified student, such as your spouse or dependent child. Eligible students include individuals enrolled in a program leading to a post-secondary degree, certificate or credential who have not already completed four years of study and are carrying at least one-half of a normal full-time course load.

To claim the Opportunity Scholarship credit, complete Part II and Part V of IRS Form 8863 (Education Credits) and attach it to your 1040 or 1040A. You can claim 100 percent of the first $2,000 in eligible expenses and 25 percent of the next $2,000. The credit is reduced if your modified adjusted gross income goes above $80,000 for single filers and $160,000 for those filing jointly.

Thanks to credits such as these, the burden of education-related costs can be alleviated -- at least in a small way. Eligible parties should ensure that all education-related expenses are carefully documented to substantiate the use of these credits/deductions.