As national student loan debt climbs over $1.5 trillion, students all over are desperate for ways to lower their debt. A popular means to do this is by taking a student loan interest deduction. The federal government offers several ways to reduce your loan interest burden based on factors like income level, student status, and family size.
Average Student Loan Interest Rates
Interest rates for federal student loans range from 4.45% to 7% depending on the type and first disbursement date. Federal loans offer fixed interest rates that remain the same throughout the loan’s lifetime. Congress controls the interest rates, so the rates for new loans could change pending legislation. Compared to private loans, federal loans more often than not have higher rates. Private loans’ rates typically fall into the 3-8% range, but vary greatly depending on the borrowers credit. Most private loans also have variable interest, meaning the interest rate changes at any given time.
Both federal and private loans are eligible for some of the student loan interest deduction and forgiveness programs outlined below.
Student Loan Interest Deduction
Anyone with federal or private student loans may be eligible for student loan interest deductions. The student loan interest deduction lets student loan holders or cosigners (one or the other) deduct the yearly interest paid up to $2,500. Remember, this is the total interest paid on your federal AND private loans in a given tax year. Considered an above the line deduction, you can make this deduction even if you choose not to itemize.
The student loan interest deduction program depends on your modified adjusted gross income. If your MAGI is $65,000 or less, you can claim up to the full $2,500. Those with a MAGI between $65,000 to $80,000 have a reduced deduction. Any individual earning $80,000 or more or any couple earning $160,000 or more is ineligible. Married couples who file separately are also ineligible. This deduction is great for recent grads with entry-level salaries, but it brings no benefit to those with high earnings.
|Student Loan Interest Deduction Example|
|Zach pays off $4,000 worth of student loan interest in the 2017 tax year. His modified adjusted income is $55,000. Since the interest he paid exceeds $2,500, he qualifies to receive the full $2,500 refund. This reduces his taxable income by $2,500, thus saving him around $625 per year. Erin pays off $6,000 of student loan interest. Her modified adjusted income is $82,000. She makes too much to qualify for the same $2,500 tax deduction as Zach.|
Interest Forgiveness from Income-Driven Repayment Plans
To make your federal student loan payments more manageable, the Department of Education provides many repayment options. Currently, many borrowers are enjoying the cost-saving perks of these income-driven repayment plans. Depending on your eligibility, you could receive at least partial interest forgiveness for all of your federal loans. While forgiveness of interest isn’t exactly a student loan interest deduction, it acts in a similar fashion to reduce your debt liability.
Income-Based Repayment (IBR)
Income-based repayment (IBR) simply means that your loan payment is based on what you earn. It also makes it possible to receive interest forgiveness for three years or loan forgiveness after 25 years of qualifying payments.
Your IBR payment will not exceed 15% of your discretionary income. Discretionary income is determined by calculating the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state of residency. Your IBR payment is based on 15% of your discretionary income if you took out a loan before July 1, 2014 and 10% if the loans were taken out after.
Use our instant calculator to see what your IBR payment could be.
Loans that qualify for this program include:
- Direct PLUS Loans
- Direct Consolidation Loans (unless they contain parent loans)
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans (unless they contain parent loans)
Interest Forgiveness in IBR
Along with reducing your monthly payments, the income-based repayment program can also forgive some of your interest payment. Since your new monthly payment is lower, in many cases, it will not cover the accruing interest. The government will then pay your loans’ interest for up to three consecutive years. Only subsidized loans qualify for this specific perk. The interest on your unsubsidized loans will continue to accumulate.
|IBR Interest Forgiveness Example|
|Jeff and his wife, who live in Florida, struggle meeting Jeff’s loan payments. They apply for the income-based repayment plan. Their adjusted gross income is $25,000. Taking 150% of the poverty line in Florida equates to $24,360. That leaves Jeff’s discretionary income at $640. He took his loan out in April 2012, so his IBR payment is 15% of his discretionary income. This equates to $96. Based on his $30,000 student loan with 6.8% interest, his 10-year repayment amount is $328. His IBR payment of $96 would be less than $328, so Jeff qualifies for IBR. The new monthly payment would be $8. Since this is between $5-10, he will owe $10 per month. His subsidized loans accrue $100 of interest each month. His monthly payment does not cover the accrued interest, so the government will pay the remaining $92 for up to three years.|
Interest Forgiveness in the Pay As You Earn Plan
Created in 2011, the Pay As You Earn (PAYE) repayment plan helps those who can demonstrate partial financial hardship. It caps your monthly loan payment at 10% of your total discretionary income. This plan forgives interest for those with who qualify for a payment that is less than the accruing monthly interest on the loan. Take note that only borrowers who took out their first federal student loan on or after October 1, 2007, and who took out a Direct Loan or a Direct Consolidated loan after October 11, 2011 qualify. Eligible loans include all Stafford, Direct Subsidized, Unsubsidized and student PLUS loans. Consolidated loans are also eligible unless they include parent loans.
|Pay As You Earn Interest Forgiveness Example|
|Joe, who lives in Hawaii, earns $30,000 per year and owes $45,000 in student loans. The poverty line for his state and family size of one is $13,860, bringing his discretionary income to $9,210. He applies for the PAYE plan because he cannot afford his $518 per month standard payment. His new monthly payment is now as low as $77 per month. His subsidized loans accrue $150 in interest each month. His $77/mo payment will first be applied to the interest on the loan, and then a government subsidy will kick in to cover the remaining $73 for the first three years that Joe uses the PAYE program.|
After qualifying for the plan, you can continue making payments even if you are no longer under financial hardship. Borrowers who make 20 years of qualified payments are offered loan and interest forgiveness. If your PAYE payment becomes too high, you have the option of switching back to the standard 10-year repayment plan.
Revised Pay As You Earn Repayment Plan
The Revised Pay As You Earn (REPAYE) plan helps those with high student debt loads who earned too much to qualify for other programs. This program caps monthly payments at 10% of your income based on family size. There is no income limit to qualify, making it a highly popular option. Eligible loan types include Federal Direct Loans or Direct Consolidation Loans. This program excludes Perkins loans and Federal Family Education Loans.
After 20-25 years of qualifying payments, you are eligible for complete loan forgiveness. This also includes forgiveness of all accumulated interest. Keep in mind, however, that loan forgiveness is viewed as taxable income.
Revised Pay As You Earn Interest Forgiveness
Like the IBR and PAYE repayment plans, your REPAYE monthly amount is calculated by using your discretionary income as determined by the poverty level for your state of residency and family size. Use the equation below to estimate your monthly payment:
With REPAYE, you might also be eligible for extensive loan interest subsidies or forgiveness. If the amount you pay monthly is less than the accruing interest, the government will pay your interest for up to three consecutive years. They will also cover half of the unpaid interest after the first three years. For your unsubsidized loans, the government will cover half of the remaining interest beginning the day you start the REPAYE plan.
|Revised Pay As You Earn Interest Forgiveness Example 1|
|Kara, who has a four-member family, and her husband have an adjusted gross income of $120,000. She owes $75,000 in student loans with a 6.8% interest rate. She currently pays $863 per month. Using the formula above with a poverty level of $24,600, she will owe just $692 per month with REPAYE. This saves her $171 every month. Her monthly payment covers her interest amount in full and puts money toward her principal.|
|Revised Pay As You Earn Interest Forgiveness Example 2|
|Sharon’s subsidized and unsubsidized loans accrue $60 each per month. Her REPAYE payment of $50 only covers $25 for each. For the first three years, the government will pay $35 toward her subsidized loan interest and $17.50 toward her unsubsidized loan interest. After three years, the government will continue to pay $17.50 toward her unsubsidized loan interest and will reduce the amount it pays on her subsidized loan interest to $17.50. As Sharon’s monthly REPAYE payment changes year to year, so will the amount the government subsidy covers.|
Direct Subsidized vs. Direct Unsubsidized Loans
Direct Subsidized Loans are granted to students who demonstrate financial need. The federal government covers their interest payments while you are at least a half-time student, within the first six months after you leave school, and during deferment periods. For qualifying individuals, subsidized loans are eligible for interest forgiveness under REPAYE, PAYE, and IBR plans. These are the only loan type that PAYE and IBR plans help pay interest for.
Students do not need to exhibit financial need to take out a Direct Unsubsidized Loan. These loans are available to both undergraduate and graduate students. The interest accumulates while you are in school and during your grace period. You have the option of paying off the interest during this time. Only the Revised Pay As You Earn repayment plan helps cover qualifying Direct Unsubsidized loan interest. It covers 50% of the interest your monthly payment cannot cover for the entire time you are in the REPAYE program.
Remember, the type of loan you have affects its eligibility for government loan forgiveness programs. Knowing this ahead of taking out student loans will help you to make the best choice for your situation. Learn more about the differences between subsidized and unsubsidized loans.
Other Deductions To Consider
American Opportunity Tax Credit
When filing taxes this year, check to see if you or someone in your household qualifies for the American Opportunity Tax Credit (AOTC). This tax credit lowers a person’s (or family’s) tax bill by up to $2,500 per eligible student. Parents can claim this credit on behalf of their children for a total of $10,000 per child over their four years in college.
Students or families who spend at least $4,000 on qualified education expenses have the potential to receive the full $2,500 tax credit. You earn credit for 100% of the first $2,000 spent and then 25% of the next $2,000 spent. If this tax credit lowers your tax down to zero dollars, you will receive 40% of the remaining credit (up to $1,000) as a refund.
|American Opportunity Tax Credit Example 1|
|Amanda spent $10,000 on qualified education expenses like tuition and books. She spent enough to receive the full $2,500 tax credit. The first $1,000 of the credit brings her taxes down to zero. She receives 40% of the remaining $1,500 as a tax refund. This brings her refund to $600.|
Other factors help determine if you qualify for the AOTC. According to the IRS, those eligible for the tax credit include students who:
- Are trying to earn a degree or recognized education credential
- Are at least half-time students for at least one semester or academic period
- Have not yet finished their first four years of college
- Have not claimed the AOTC for more than four tax years
- Do not have a felony drug conviction at the end of the tax year
Your income or modified adjusted gross income (MAGI) also determines whether you qualify. To claim the full $2,500, your individual income must be $80,000 or less. Married couples filing jointly must make $160,000 or less. Individuals earning between $80,000-$90,000 or married couples making between $160,000-$180,000 will receive a reduced tax credit. Those with a MAGI over $90,000 or $180,000 jointly are not eligible.
|American Opportunity Tax Credit Example 2|
|Matthew is enrolled full-time in a four-year degree program at an accredited university. His parents, who file jointly, have a modified adjusted gross income of $79,000. He is the couple’s first child in college and still has three years left of school. Assuming their son has no felony drug conviction, these parents can apply for the American Opportunity Tax Credit. In 2017, the family paid $18,500 of qualified education expenses. Matthew and his family would qualify for the full $2,500 tax credit because their expenses exceeded $4,000.|
Make note that if your parents are ineligible for the deduction based on their income level, you can claim the credit yourself. To do this, your parents cannot claim any other college-related tax credit on your behalf or claim you as a personal exemption. Also, keep in mind that families can deduct only one college-related tax credit and one college-related tax deduction per child each year.
Lifetime Learning Credit
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.