student-loansPaying off student loans may be the least enjoyable part of your new life as a college graduate, but there is one benefit: You may qualify for tax deductions for student loan borrowers. Loan consolidation or refinancing can also help you and tax incentives may be just one more reason to do it.

The tax deduction on student loans can reduce your taxable income by as much as $2,500 and is available if:

  • You are not claimed as an exemption on someone else’s tax return
  • You are not married but filing taxes separately
  • The loan was taken out solely to pay for qualified education expenses
  • The loan was not from a family member or made under a qualified employer plan
  • Your modified adjusted gross income (MAGI) is $75,000 or less for singletax payers or $155,000 or less for married filing jointly filers. (If you earn more than $60,000 for single filers or $120,000 for joint filers, your deduction will be less than $2,500.)

The Internal Revenue Service (IRS) defines student loan interest as the interest you pay on qualified student loans during the tax year. Qualified loans are for you, your spouse or a person who was a dependent at the time of a loan used for postsecondary education.Proceeds of the loan must have been disbursed up to 90 days before an academic period or up to 90 days after that period ended, when the student was enrolled at least half-time.

Loans must have been used for qualified education expenses, defined by the IRS as tuition and related expenses required for enrollment or attendance at an eligible education institution. Eligible institutions are postsecondary educational institutions that are eligible to take part in federal financial aid programs.

This deduction can be taken whether you itemize or not.

For complete details, see IRS Publication 970, Tax Benefits for Education, available online at

Refinancing student loans can help you in numerous ways. If you have a good credit rating, you may be eligible for a better interest rate and that will help you most if you refinance early in the loan’s payoff term.

If you consolidate your loans to refinance, you also have a single loan payment instead of multiple loans.

You need to be aware of the pros and cons of refinancing and consolidation, however. In either case, you’ll be better off if you do it early, since you’ll be restarting the payoff clock with a new loan. Be aware of the potential for loan forgiveness programs available for certain federal loans. Check to see if you qualify and, if so, look into a Direct Consolidation Loan, which is eligible for some forgiveness programs, instead of a private loan.

For tax incentives and refinancing or consolidation, understand all the rules before you pull the trigger. The IRS advises consulting a tax professional regarding education tax benefits. Free tax help is available from the IRS.


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