As the cost of higher education continues to rise, student debt is becoming a major political and economic problem. Young people languishing under mountains of student debt are finding it difficult to get a grip on their finances after graduating from college. Many are moving back in with their parents or continuing to live in college-style housing collectives. To make matters worse, the poor economy is making it difficult for many student borrowers to afford the monthly payments on their loan balances.
Every year, thousands of young Americans reluctantly declare bankruptcy in an attempt to escape from this crushing financial burden. Unfortunately, most student loans can't be forgiven through bankruptcy.
The federal government recognizes that student debt has become a major problem for young Americans. To alleviate some of the financial pressure on recent college graduates, the IRS offers a popular tax perk known as the Student Loan Interest Deduction. This tax deduction may reduce the effective taxable income of some student borrowers. Unlike a tax credit, it doesn't directly reduce filers' total tax burdens.
If you have massive amounts of student loan debt, you may be able to claim the Student Loan Interest Deduction on each tax return that you file until you've finished paying off your loans. In order to do so legally, you'll need to meet several qualifications. First, you must have earned $74,999 or less during the year for which you're claiming the deduction. If you earned between $60,000 and $74,999 during the applicable year, you'll have to prorate your deduction according to a sliding scale. If you earned less than $60,000, you'll be able to claim the full amount provided that you meet certain other criteria.
If you're filing jointly with your spouse, you can claim the full amount of your combined interest as long as you collectively earned less than $120,000. You'll be able to claim a prorated portion of your combined interest as long as you collectively made less than $150,000 and more than $120,000.
In order to claim your Student Loan Interest Deduction, you must not be listed as a dependent on another person's tax return. In addition, you cannot file your taxes using the "Married Filing Separately" status. If you're married, you must file jointly with your spouse. Keep in mind that you can't deduct the full amount of your student loan repayments. You may only claim the interest that you paid on your loan during the applicable tax year.