Most student loan borrowers are losing a big tax deduction for 2020

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Interest payments can’t be deducted because of an earlier government pause

People with student loans may make an unpleasant discovery when they start to prepare their 2020 federal income tax return. A deduction that many may have enjoyed in past years will be missing.

The deduction is the interest paid on student loan balances. The Internal Revenue Service (IRS) allows student loan borrowers to deduct up to $2,500 in interest charges on their loans. That can amount to significant tax savings.

But the deduction won’t be available for most of 2020 because almost all student loan borrowers didn’t pay the usual interest last year. Last March, Congress suspended interest payments until March 2021, and the Biden administration has just extended the break until September.

“You can claim the student loan interest deduction based only on amounts actually paid,” author and higher education expert Mark Kantrowitz told CNBC.

Widely-used deduction

In past years, interest payments have been a widely used deduction. By some estimates, as many as 12 million taxpayers claimed the deduction in 2018, the last year for which there is data. Some borrowers who have been unaffected economically by the pandemic may have continued to make student loan payments through all of last year, but they won’t be able to claim the deduction because the government paused all interest payments. 

If consumers continued to make payments, then the entire amount went to pay down their loan balance and none went toward interest, which is a pretty good deal that offsets some of the deduction loss.

The interest payment pause didn’t take effect until mid-March last year, so borrowers will still be able to deduct around two months of interest payments.

What student loan borrowers should know

If you are making payments on a student loan and have never heard about the deduction, you should be able to claim it next year -- at least for the last three months of the year. The IRS says you can claim the deduction if all of the following apply:

  • You paid interest on a qualified student loan in tax year 2020;

  • You're legally obligated to pay interest on a qualified student loan;

  • Your filing status isn't married filing separately;

  • Your MAGI is less than a specified amount which is set annually; and

  • Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else's return.

The IRS has more information about the student loan interest deduction here.

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