How To Use The 1098-E To Deduct Student Loan Interest

The 1098-E form allows student loan borrowers to claim a deduction on their federal tax return. This can be an incredibly beneficial way for students to save money and reduce their taxable income, allowing them to keep more of their hard-earned cash. Whether you’re a recent grad or paying off loans from years ago, understanding the 1098-E form can help you maximize your savings. 

A student loan deduction is a provision that allows student loan borrowers to deduct the amount of interest they have paid on their loans from their federal tax returns. This deduction can provide significant savings for those with student loan debt, as it reduces your taxable income and lowers your overall tax bill.

What is Form 1098-E?

The 1098-E form is used to document the interest paid on loans during a given tax year, and allows the borrower to claim their deduction.

To take advantage of this deduction, borrowers must fill out Form 1098-E and attach it to their tax return when filing. The information provided on the form is used by the Internal Revenue Service (IRS) to determine how much interest has been paid  and to calculate the deduction amount. Additionally, the 1098-E form is also used by loan servicers to report interest payments and other related information to the IRS. Borrowers should keep a copy of their 1098-E for their own records in case there are discrepancies or questions about the deductions when filing. By utilizing this form, borrowers can save money on their taxes and reduce their overall student loan debt. 

How do you qualify for Student Loan Interest Deductions?

  1. Loan must qualify: To qualify for the student loan interest deduction, your loan must meet certain criteria. The loan must be a federally-guaranteed student loan such as a Direct Loan from the Department of Education, or any other type of qualified education loan (including private loans if they were used for qualified education expenses).
  2. Good standing: Your loan must be in good standing when the interest was paid, meaning it wasn’t past due or in default.
  3. Income level: You must meet certain income thresholds to qualify for this deduction, based on your filing status. Generally speaking, if you make less than $80,000  in adjusted gross income ($160,000 for married filing jointly), you are eligible to claim the deduction.
  4. Limitations: The student loan interest deduction is subject to certain limitations. The maximum amount of eligible interest that can be deducted per tax year is $2,500. Additionally, the deduction will phase out if your modified adjusted gross income is greater than the aforementioned limits.
  5. Documentation: You must have documentation of your student loan interest payments, typically provided on Form 1098-E, to be able to take this deduction. This form will show how much interest you paid during the tax year and will need to be included when filing your taxes.

Student Loan Interest Phase Out

When your Adjusted Gross Income is too high then you may be given a phase-out in deductions. This means that instead of a full deduction, you may only be eligible for a reduced amount.

The phase-out calculation is based on your AGI, and also considers other factors such as your filing status and the type of loan you have. For example, a single filer with an AGI of $80,000 would see their student loan deduction gradually phased out when compared to a single filer with an AGI of $50,000.

The exact limits will vary depending on your filing status and type of loan, but generally speaking the limit for single filers is $85,000 in AGI and $170,000 for joint filers before any phase out occurs. If your AGI is higher than these limits, then you may not be eligible for a student loan deduction.

Maximum Student Loan Interest Deduction

The maximum amount of eligible interest that can be deducted per tax year is $2,500. In order to qualify, you must also have documentation of your student loan interest payments, typically provided on Form 1098-E. This form will show how much interest you paid during the tax year and will need to be included when filing your taxes. Keeping good records of your interest payments is important to ensure that you are taking maximum advantage of this deduction. 

How do you calculate the interest deductions?

When calculating the student loan interest deduction, it is important to note that only certain types of loans qualify. These include Direct Loans from the Department of Education as well as other qualified education loans such as private loans if they were used for qualified educational expenses. Also, your loan must be in good standing when you paid the interest and you must have documentation of your interest payments. The maximum amount of eligible interest that can be deducted per tax year is $2,500.

To calculate the deduction amount, subtract any loan origination fees from the total amount of interest paid during the tax year and then multiply this figure by the marginal tax rate for your filing status to get the actual deduction amount. For example, if you paid $400 in interest and $50 in loan origination fees, the deduction amount would be calculated as follows: ($400 – $50) x marginal tax rate = deduction amount. In addition to calculating the deduction amount, you must also consider whether or not you meet the income qualifications for this deduction. Finally, remember to include Form 1098-E when filing your taxes – this form will show how much interest you paid during the tax year.

How to Read and Submit Form 1098-E?

Form 1098-E is the form provided by lenders that will show how much interest you paid during the tax year. It should be mailed to you in January and it must be included when filing your taxes.

To read Form 1098-E, start by looking at box 1 which lists how much student loan interest was paid in the past tax year. This is the figure that you will use to calculate your deduction amount. 

Box 2 will list any loan origination fees or points paid; this figure should be subtracted from box 1 before calculating your deduction amount as only interest payments are eligible for deduction. 

Lastly, box 3 may include other miscellaneous information related to the loan or lender. 

Once you have read and understood your 1098-E form, you will need to submit it when filing your taxes. Most lenders provide an online copy of the form which can be submitted directly to the IRS. For those who don’t have access to online copies, a paper copy should be sent in with your  tax return. 

Remember that the student loan interest deduction is only available to those who meet certain income and documentation requirements, so be sure to review all information carefully before filing your taxes. Keeping good records of your interest payments is important for taking advantage of this deduction and ensuring accuracy in filing your return.

Alternatives to Student Loan Interest Deductions

American Opportunity Tax Credit:

The American Opportunity Tax Credit (AOTC) is a tax credit available to those who pay tuition and other related expenses for higher education. It is worth up to $2,500 per eligible student and can be claimed for the first four years of post-secondary education. To qualify, students must meet certain income requirements, be enrolled in an eligible degree program at least half-time, and have not yet earned a bachelor’s or professional degree.

Lifetime Learning Credit:

The Lifetime Learning Credit is available to those who are paying for expenses related to higher education, such as tuition and fees. This credit is meant to help offset the cost of courses taken to acquire or improve job skills and can be used for an unlimited number of years. It is worth up to $2,000 per eligible student each year and requires students to meet certain income requirements.

College Savings Plus:

College Savings Plus is another option to help cover higher education costs. It is an employer-sponsored savings plan that allows employees to set aside money for college in a tax-advantaged account. Contributions are taken from paychecks on a pre-tax basis, which means there is no current federal income tax due on the amounts deposited into the account. This option can help families save for college costs and offers the benefit of lower taxes by allowing them to save on a pre-tax basis.

FAQs

How to get 1098 e form?

The 1098 e form can be downloaded from your loan servicer’s website or you can ask for it directly from the servicer.

Are all student loans eligible for the deduction?

Only certain types of student loans are eligible. Generally, these include federal and private educational loans taken out solely to pay qualified education expenses.

Is the student loan interest deduction subject to any phase-out limits?

Yes, the deduction may be phased out if your modified adjusted gross income exceeds certain thresholds. Refer to IRS Publication 970 for more information on eligibility criteria and phase-out amounts.

Can I take the deduction if I paid my student loan early?

Yes, you can still take the deduction as long as the loan was taken out solely to pay qualified education expenses.

Final Thoughts

By understanding the criteria and qualifications necessary for the student loan interest deduction, borrowers can ensure that they are able to take full advantage of this valuable tax break.  With a little preparation, you can maximize the benefits of the 1098-E form and take advantage of the student loan interest deduction. Be sure to review all qualifications, eligibility criteria, deadlines, and other necessary information before filing your taxes in order to make the most of this student loan interest deduction.