Here's why Post-Pandemic Resumption of Student Loan Repayments Could Help People Save Taxes

Student loan payments are back to add a financial burden this fall after a prolonged pandemic-era pause. But there's also a glimmer of hope for borrowers facing the financial strain, since eligible student loan borrowers may get a tax break for the 2023 season, in the form of a student loan interest deduction. This deduction allows qualifying individuals to deduct up to $2,500 annually for interest paid on eligible private or federal education debt.

During the pandemic, a suspension of student loan bills and interest accrual spanned more than three years, leading to a unique situation where many federal loan borrowers lost their eligibility for the interest deduction because they weren't actively making payments during this period. As most loans were set to a 0% interest rate, borrowers need to be aware that the deduction can only be claimed based on the actual amounts paid.

With student loan repayments with interest coming back in September 2023, borrowers may have three or four months' worth of payments to consider for their 2023 tax deduction. This could potentially reduce their overall tax liability.

Before the Covid-19 pandemic, nearly 13 million taxpayers took advantage of the student loan interest deduction. To ensure eligibility for this tax break, borrowers need to be aware of several key factors.

Firstly, borrowers should get a tax form called a 1098-E, which reports interest payments of $600 or more to the IRS. This form is provided by the lender or student loan servicer. In case it is not received, borrowers can obtain it directly from their servicer.

It's important to note that eligibility for the deduction may be affected by income and employer aid. Depending on the individual's tax bracket and the amount of interest paid, the deduction can be worth up to $550 annually. Notably, this deduction is "above the line," meaning borrowers don't need to itemize their taxes to claim it. But, income limits start phasing out individuals with a modified adjusted gross income (MAGI) of $75,000, and those with a MAGI of $90,000 or more are not eligible. For married couples filing jointly, the phaseout begins at $155,000, with ineligibility for those with a MAGI of $185,000 or more.

Betsy Mayotte, president of The Institute of Student Loan Advisors, highlights that borrowers' eligibility for the deduction may also be impacted if their employer made payments on their student loans as a work benefit.

In a positive development, lawmakers recently introduced a bill aiming to expand the student loan interest deduction. If passed, this bill would increase the deduction from $2,500 to $10,000 annually. Eligible borrowers could also claim an extra $500 deduction for each dependent, and the scope of the deduction would extend beyond just the interest portion to cover all student loan payments.

As student loan borrowers navigate the resumption of payments, the potential tax break offers a welcomed reprieve. While current eligibility criteria exist, legislative efforts to expand the deduction signal a recognition of the evolving landscape of student debt in the United States. Borrowers are advised to stay informed about changes in tax laws and explore available options to optimize their financial situations.