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Taxes

Do you have private student loans? Don't forget to take this tax deduction

Those with private student loans should remember to deduct the interest on their recent tax return.

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Source: Getty Images

While federal student loan borrowers haven't had to face loan repayment or worry about racking up interest charges since the beginning of the pandemic, private student loan borrowers haven't been as lucky since the current federal payment moratorium doesn't apply to student loans that are privately funded.

According to EducationData, it's estimated that 13% of students use loans from a private source such as a bank or credit union. As student loans continue to be a burden for millions of Americans, there's a bit of a silver lining in the form of a special tax benefit those in this situation can take advantage of.

Below, Select details a helpful tax benefit all private student loan borrowers should be aware of and how they can reduce the amount of student loan interest they'll pay in the future.

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Using the student loan interest tax deduction

If you accrued any student loan interest in 2021, your lender should be sending you a 1098-E form, which discloses how much you have paid in total for that year. You'll find this on line 21 of the Schedule 1 (form 1040), and you're able to deduct up to $2,500.

Note, however, that this deduction is limited and based entirely on your 2021 income. If your modified adjusted gross income was under $70,000 (for single filers) or $140,000 (if filing jointly,) you're allowed to deduct the entire $2,500. If your modified adjusted gross income was between $70,000 and $85,000 (for single filers) or $170,000 (if filing jointly), you're allowed to deduct less than than the $2,500 maximum.

Keep in mind that any principal you pay down on your student loan is not tax-deductible. Whether you're working with a tax professional or using a tax software service like H&R Block or TurboTax, indicate the amount of student loan interest you paid in 2021 to help reduce your taxable income.

H&R Block

On H&R Block's secure site
  • Cost

    Costs may vary depending on the plan selected - see breakdown by plan in the description below

  • Free version

    Yes (for simple returns only)

  • Mobile app

    Yes

  • Live support

    Yes, costs extra

  • Better Business Bureau rating

    A+

Terms apply, see below for our methodology.

Pros

  • Simple step-by-step guidance that's easy to follow
  • Unlimited on-demand chat or video support with Online Assist plans
  • Ability to speak to a tax expert who has an average of 10 years experience (costs extra)
  • Over 11,000 physical locations so you can meet with a tax expert in-person
  • Maximum refund guarantee, or H&R Block will refund the plan fees you paid
  • Audit support guarantee, which provides free assistance if you get an IRS or other tax notice
  • 100% accuracy, or H&R Block will reimburse you for any penalties or interest up to $10,000

Cons

  • Plans that include speaking with a live tax expert start at $69.99 for federal, plus additional state fee
  • One of the more costly software programs

Cost breakdown by plan:

20% off DIY online tax filing - offer ends April 18, 2022

  • Free (for simple returns): $0 federal, $0 per state
  • Deluxe (helps you maximize credits and deductions): $43.99 federal, $44.99 per state
  • Premium (includes returns with investments and expenses): $59.99 federal, $44.99 per state
  • Self-employed (for personal and business income and expenses): $91.99 federal, $44.99 per state
  • Online Assist Basic (includes help from tax experts): $69.99 federal, $0 per state
  • Online Assist Deluxe (includes help from tax experts): $109.99 federal, $44.99 per state
  • Online Assist Premium (includes help from tax experts): $159.99 federal, $44.99 per state
  • Online Assist Self-employed (includes help from tax experts): $194.99 federal, $44.99 per state

TurboTax

On TurboTax's secure site
  • Cost

    Costs may vary depending on the plan selected - see breakdown by plan in the description below

  • Free version

    For simple tax returns only. See if you qualify.

  • Mobile app

    Yes

  • Live support

    Yes, costs extra

  • Better Business Bureau rating

    A+

Terms apply, see below for our methodology.

Pros

  • Step-by-step guidance with a Q&A format that is easy to follow
  • TurboTax Live provides on-demand advice and a final review from a tax expert
  • Live Full Service has a tax expert prepare, sign, and file your return
  • Accuracy and maximum refund guaranteed*
  • Audit support, which provides free assistance if you get an IRS or other tax notice

Cons

  • More costly than other software programs
  • Live expert assistance plans have additional costs

Cost breakdown by plan:

  • Free (For simple tax returns only. See if you qualify): $0 federal, $0 per state
  • Deluxe (helps you maximize credits and deductions): $39* federal, $39* per state
  • Premier (includes returns with investments and expenses): $69* federal, $39* per state
  • Self-employed (for personal and business income and expenses): $89* federal, $39* per state
  • Live Basic (includes help from tax experts): for a limited time, $0* federal, state included - simple tax returns only; must file by 3/31
  • Live Deluxe (includes help from tax experts): $119* federal, $49* per state
  • Live Premier (includes help from tax experts): $169* federal, $49* per state
  • Live self-employed (includes help from tax experts): $199* federal, $49* per state
  • Full Service Live Basic (includes help from tax experts): for a limited time, $0* federal, state included - simple tax returns only; must file by 2/15
  • Full Service Live Deluxe (includes help from tax experts): $249* federal, $49* per state
  • Full Service Live Premier (includes help from tax experts): $359* federal, $49* per state
  • Full Service Live self-employed (includes help from tax experts): $389* federal, $49* per state

*Click here for TurboTax offer details and disclosures

**A simple tax return is Form 1040 only.

How to reduce your student loan interest

Paying down your student loans isn't a fun journey, and seeing the interest rack up on all that debt can feel like adding salt to the wound. The good news is there is one way you can significantly reduce the amount of interest that's being paid out.

Refinance your student loans

Similar to the way you would refinance a mortgage, the act of refinancing your student loans simply means you're moving your debt from one place to another in order to earn a lower interest rate or secure better repayment terms. The best part is the process is simple and in many cases, fee-free.

I've actually refinanced my student loans six times and it's saved me tens of thousands of dollars in interest, allowing me to significantly pay down my loans from nearly $80,000 to less than $10,000 in under seven years. Now that I'm working with a mere 2.25% interest rate by using a personal line of credit, I'm slowly paying back my loans and prioritizing investing within my 401k and Roth IRA.

To get started refinancing, find your current student loan balance, interest rate and repayment schedule. From there, see if a student loan refinancer like SoFi or Laurel Road can offer better repayment terms or come up with a lower interest rate.

In my own student loan journey, the combination of making heavy repayments and refinancing my interest rates down as far as possible has been the key to paying them off in full.

Just remember that if you have federal student loans and refinance them with a private lender, you'll lose federal protections and won't be eligible for the current federal student loan payment mortarium.

SoFi Student Loan Refinancing

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans

  • Loan types

    Variable and fixed

  • Variable rates (APR)

    From 2.49%; from 2.49% for medical/dental residents (rates include a 0.25% autopay discount)

  • Fixed rates (APR)

    From 3.99%; from 3.99% for medical/dental residents (rates include a 0.25% autopay discount)

  • Loan terms

    5, 7, 10, 15, 20 years

  • Loan amounts

    From $5,000; over $10,000 for medical/dental residency loans

  • Minimum credit score

    N/A

  • Minimum income

    N/A

  • Allow for a co-signer

    Yes

See our methodology, terms apply.

Pros

  • No application or origination fees to refinance
  • 0.25% autopay discount already applied
  • Soft credit pull when you prequalify
  • No prepayment penalties
  • Protections include: Unemployment protection (forbearance offered in 3-month increments, capped at 12 months), Covid forbearance of payments for a minimum of 90 days if experiencing financial hardship, loan deferment if going back to school, SoFi honors first 6 months of pre-existing grace period on loans looking to be refinanced
  • Offers $100 monthly payments during residency
  • SoFi has its own Career Advisory Group to help members look for new employment
  • Access to live customer support 7 days a week
  • SoFi members get career coaching, financial advice from planners, plus more for free
  • Unique member benefits like receive a 0.125% interest rate discount on any additional SoFi lending product
  • Offers up to $310 bonus referral program

Cons

  • No co-signer release option available
  • Loan size minimum of $5,000; over $10,000 for medical/dental residency loans

Laurel Road Student Loan Refinancing

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency/fellowship loans, plus special pricing and reduced rates for health-care professionals (physicians, dentists, optometrists and physician assistants)

  • Loan types

    Variable and fixed

  • Variable rates (APR)

    From 1.89%; from 2.28% for resident rates (rates include a 0.25% autopay discount)

  • Fixed rates (APR)

    From 2.80%; from 3.08% for resident rates (rates include a 0.25% autopay discount)

  • Loan terms

    5, 7, 10, 15, 20 years (but also offers any term below 20 years, subject to underwriting criteria)

  • Loan amounts

    For bachelor's degrees and higher, minimum $5,000; for eligible associate degrees in the health-care field, up to $50,000 in loans for non-ParentPlus refinance loans

  • Minimum credit score

    N/A

  • Minimum income

    N/A

  • Allow for a co-signer

    Yes

See our methodology, terms apply.

Pros

  • No origination fees to refinance
  • 0.25% autopay discount already applied
  • Soft credit pull when you prequalify
  • No prepayment penalties
  • Protections include: Financial hardship (such as job loss) forbearance for one or more 3-month time periods (have to wait minimum 12 months in between periods), Covid forbearance of 3 monthly payments (and option to request longer), natural disaster forbearance of up to 2 monthly payments, deferment for medical students up to 6 months after their residency and fellowships (total loan term including residency, fellowship and grace period must not exceed 20 years)
  • Medical students pay only $100 per month while in residency program or fellowship
  • Graduates with associate degrees in the health-care field can refinance
  • Offers up to $400 bonus referral program

Cons

  • No co-signer release option available
  • Late fee may be assessed if any part of a payment is not received within 15 days of the due date: will not exceed 5% of the late payment or $28, whichever is less
  • May be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds or a closed account
  • Loan size minimum of $5,000

Bottom line

Student loans are a large financial burden for millions of Americans, but with an aggressive debt pay-down strategy of refinancing your loan and taking advantage of tax benefits along the way, you can begin crushing your student debt.

And once your student loans are under control and you're confident you can continue paying them down, you'll be able to prioritize other important things, like having a fully-funded emergency fund and investing for the future.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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