It is on record that 70% of college graduates took student loans to pay for their tuition and other financial needs in school.
Hence the need to have a better understanding of what student loan is all about.
This incentive cost the U.S. government about $1.8 billion in foregone income in 2016, as reported by The Pew Charitable Trusts. The cost has increased since 2007 because student loan balances climaxed. This has not altered the maximum amount of deduction that was set at $2,500 more than 15 years ago.
If the federal student loan interest deduction is no longer in existence, the states also offer deductions. In Fact, there are 37 states and Washington D.C. which offer students such benefits.
However, it has been reported in some quarters that the House is proposing a bill that will increase the amount a student can deduct from interest. It will increase for single people to $12,000 and married people will see it get as high as $24,000.
Notwithstanding the alleged increase, there were rumors that student loan deductions will be scrapped after the Tax Cuts and Jobs Act is passed into law at the end of last year. The first version of the bill included that the student loan deduction should be done with.
Most congressmen were against it when students protested it all over the country.
Presently, the student loan deduction will likely remain after the passage of the bill. Your loan servicer has the records of all the interest you have paid over the year.
Like every other law, not everyone is eligible for a student loan. The good news is that after obtaining this loan, the law allows you to deduct interest on your loans. The student deduction loan will help most college graduates who may not be able to avoid owning a home or car.
Read on so you can get equipped with the modality of obtaining a student loan deduction.
What makes you eligible for a student loan deduction?
The law allows you to deduct $2,500 of your student loan interest paid in one year. There is a limit to the deduction amount that you can make. Your gross income is not supposed to be higher than $80,000 and for married couples, it’s $160,000 for both of you.
For instance, if your gross income is between $65,000 and $80,000, the deduction is removed slowly until it gets to the upper limit.
You are only entitled to a loan deduction if it is gotten from a qualified source. Examples of unqualified sources are as follows:
• When your parents give you a loan of $15,000 for your studies. You can’t deduct the interest on this loan.
• When your company gives you a loan. Keep in mind you are not entitled to a student loan interest deduction.
• And you are not eligible to deduct interest that you made on either minimum or extra payments to service your loan.
But you can only deduct interest on the loan if it was taken out directly by you, a spouse or a dependent. If you are receiving money for your studies, it is paramount that you get enrolled at least half the time in order to be eligible for a student loan deduction.
You must make use of the loan money within a stipulated time for qualified education expenditures. The IRS refers to this period as a “reasonable amount of time.” According to the IRS, almost 12 million people took student loan interest in 2015.
Sometimes people are confused about who can take the deductions. The IRS clarified this dilemma when it said that it was the person whose name is on the loan.
One major factor that most students fail to consider is the eligibility of the college as it regards to student loan deductions. The IRS has advised students to ensure that the college they attend is an eligible educational institution.
This will entitle them to deduct interest if they attend a school with eligible status.
Other factors to consider have to do with your tax filing. You can file your taxes with whatever status you desire but married people can’t file separately.
Married couples who file their taxes jointly are only eligible to deduct $2,500 in interest even when you’re repaying your loans.
Important Factors to Bear in Mind
Remember that student loan deduction is just a temporary measure. Don’t rule out the idea of paying off your loan. If you can pay off your loan faster, then please do. Some students want to take advantage of the student loan deduction by extending their payments. Student loan deduction is different from a tax credit.
A deduction only reduces the entire taxable income paid. Tax credit and student loan deductions help a lot, but the deduction is a partial refund of payments made.
Experts have advised that prompt payment will give you the time to plan for other future endeavors like owning a home, car, etc. Although your tax return will be reduced, fast payment remains the best option.
College and University Councils have warned that any move to repeal student loan deduction will increase the amount owed by students to $24 billion in the next 10 years. A senior vice president of the American Council of Education known as Terry W.
Hartle said that allowing the student loan deduction program to have a continuous existence is a good idea. He further said that anyone who is worried about the level at which students are indebted will not suggest that this incentive is scraped.
However, others have criticized the continuous existence of student loan deduction as an insufficiently targeted way to assist borrowers. They seem to propose that the sum used for student loan deduction should be injected into tax credits. They believe that this way, low and medium income students will benefit more.
More students are indebted, and the number is growing by the day. Currently, 44 million students must pay back over $1.3 trillion as debt. You must obtain a student interest deduction form to access this incentive.
A visit to the IRS website will also help you know your eligibility status.