What Student Loan Tax Credit Can I Claim?

The IRS offers students two tax credits to help offset their educational expenses: the American Opportunity Tax Credit, and the Lifetime Learning Credit. In addition, students are allowed to deduct up to $2,500 of loan interest paid on their taxes.

What’s the difference between a tax credit and a tax deduction?

While both tax credits and tax deductions help reduce the amount individuals have to pay on their taxes, there is a key fundamental difference between the two.

  • Tax credits are deductions applied directly to the amount owed in taxes, and can sometimes lead to a tax refund (if the credit is greater than the amount owed).
  • Tax deductions are applied to the individual’s Modified Adjusted Gross Income (MAGI). While tax deductions are still helpful, they don’t have as big an impact as tax credits.

Tax Credits on Student Loan Interest

The American Opportunity Tax Credit

The American Opportunity Tax Credit allows students or their parents to claim up to $2,500 on their tax return to offset educational costs. Only parents who claim the student as a dependent on their taxes are eligible.

Only single households earning less than $90,000 and married filing joint households earning less than $180,000 qualify for this tax credit. The credit is available for the first four years of the student’s college career.

The Lifetime Learning Credit

The Lifetime Learning Credit allows you or your parents – should they claim you as a dependent on their taxes – to claim up to $2,000 for qualified education expenses. To qualify for the Lifetime Learning Credit, students must be enrolled for at least one academic period at an eligible higher education institution.

The credit is worth 20% of educational expenses up to $10,000. Only individuals with a Modified Adjusted Gross Income of $66,000 or less as a single filer, or $132,000 or less as a married filing joint filer are eligible for the credit.

You will need to fill out tax form 8863 to claim both tax credits.

Student Loan Interest Deduction

If you’re already paying interest on an unsubsidized loan, or if you’re out of college and you’re now responsible for the accruing interest on a subsidized loan, you may be eligible for a deduction on your taxes.

Students or former students are allowed to deduct the lesser of $2,500 and the amount of interest paid during a given tax year from their MAGI. Single filers earning less than $80,000, and married filing joint filers earning less than $160,000 qualify for the deduction.