There's some good news for people paying student loans.
Shortly after taking office on Jan. 20, President Joe Biden's directed the Department of Education to continue loan payment relief. The next day, the Department complied.
"At the request of President Biden, the Acting Secretary of Education will extend the pause on federal student loan payments and collections and keep the interest rate at 0%," noted the brief statement on the Education Department's website. The Education Department announcement also reiterated the reason cited by Biden: the economic crises caused by the COVID-19 pandemic.
President Joe Biden's Student Loan Executive Order
Borrowers with federal student loans have had their loan repayments and interest accrual paused since March 13, 2020. Collection on defaulted loans also has been suspended since then.
Biden's Executive Order instructed the Education Department to extend the pause on principal payments and interest accrual for direct federal loans until at least Sept. 30, 2021.
The student loan payments waiver, per Biden one of the 17 Executive Orders he signed following the inauguration ceremony, will extend through Sept. 30. It had been scheduled to expire Jan. 31.
As Biden's order noted, this relief has been in effect form most of 2020. But students or their parents who did make some higher-education loan payments before then also need to be sure to take a related tax break when they file their 2020 returns this year.
Deducting interest you did pay: Interest up to $2,500 a year can be claimed as an adjustment to the loan paying taxpayer's income.
If you paid $600 or more of interest on a qualified student loan during the year, you should receive a Form 1098-E, Student Loan Interest Statement from the entity to which you paid the student loan interest.
When you determine how much student loan interest you paid during the tax year, you'll claim it on Form 1040 Schedule 1. This tax break, along with the others shown in the form's excerpt below, are still referred to by most in the tax community as an above-the-line deductions.
These deduction amounts, including the allowable student loan interest, help reduce your gross income. That should mean you have lower taxable income, reducing what you owe Uncle Sam at least a bit.
Even better, you don't have to itemize. You still claim the standard deduction amount for your filing status, then subtract your above-the-line deductions total on Schedule 1 directly on your Form 1040.
Student loan interest deduction overview: Here are the basics when it comes to claiming this tax break.
Student loan interest is interest you paid during the tax year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments.
You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year.
The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
For the 2020 tax year, which is the return you'll file once the Internal Revenue Service starts accepting returns on Feb. 12, the deduction is phased out for married jointly filing taxpayers with earnings between $140,000 and $170,000 and for single filers making between $70,000 and $85,000.
Once you make more than the top amount for your filing status, you can't claim the student loan interest deduction. Also, if you are married and each spouse files a separate return, you cannot claim this tax break.
Precise tax rules: Specifically, the IRS says you claim the student loan interest deduction if all of the following circumstances 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 based on inflation; and
- Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else's return.
What kind of loan counts: As for the loan itself, the IRS say a qualified student loan is one that you took out solely to pay qualified higher education expenses that meet the three conditions listed below.
- For you, your spouse or a person who was your dependent when you took out the loan;
- For education provided during an academic period for an eligible student; and
- Paid or incurred within a reasonable period of time before or after you took out the loan.
You can find more on student loan tax treatment in IRS Publication 970, Tax Benefits for Education. You also can check out the IRS online tool Can I Claim a Deduction for Student Loan Interest?
And about those loans for which payments, including interest, are on hold, the graphic below created by Federal Student Aid, an office of the U.S Education Department, elaborates.
You also might find these items of interest:
- Getting the tax info needed to complete FAFSA
- Once-lauded college benefactor admits to $139 million tax fraud scheme
- 529 plans, other tax breaks help cover education expenses, even during a pandemic