In August, the U.S. Department of Education announced that there will be a final extension of the pause on student loan repayment until January 31, 2022. This extension continues to suspend loan payments, the collection on defaulted loans, and the 0% interest rate.
Some taxpayers may still have an outstanding interest balance accrued prior to the pause of payments which began March 13, 2020. The student loan interest deduction is available to qualifying taxpayers and is based on interest that is paid during the year, it does not have to be accrued during the same year.
Those eligible to take the deduction, can make an interest only payment to pay down the accrued interest and claim the deduction as an adjustment to income. The deduction is for the lesser of $2,500 or the amount of interest you paid.
In order to claim the deduction, all of the following must apply:
The interest must be paid on a qualified student loan which means it was for higher education expenses that were:
For the taxpayer, spouse, or a dependent
For education provided during an academic period
Paid or incurred within a reasonable period of time before or after taking out the loan
You are legally obligated to pay the interest on the loan
You are not filing a married filing separately return
The modified AGI on your tax return is less than the annual limit, for 2020 this was $70,000
Neither you nor your spouse can be claimed on someone else’s return as a dependent
Anyone who pays $600 or more of interest on their loan should receive a Form 1098-E, Student Loan Interest Statement that you can provide to your tax preparer to include on your return. Otherwise, your loan servicer should be able to provide you with a statement showing the interest paid during the year.