How to Reduce Your Tax Bill with Student Loan Tax Credits

When it comes to financing higher education, student loans are often a necessary evil. However, the IRS offers two tax credits and a deduction that can help alleviate some of the financial burden.

In this article, we will explore the difference between tax credits and tax deductions and explain the specific tax benefits available for student loans.

Tax Credit vs. Tax Deduction

Understanding the distinction between a tax credit and a tax deduction is crucial. While both can reduce the amount you owe on your taxes, they work in different ways.

Tax credits are deductions that are directly applied to the amount owed in taxes. In some cases, tax credits can even lead to a tax refund if the credit exceeds the tax liability. On the other hand, tax deductions are subtracted from an individual’s Modified Adjusted Gross Income (MAGI), which in turn reduces the overall tax liability. Although tax deductions are still valuable, they generally have a lesser impact than tax credits.

Tax Credits for Student Loan Interest

The American Opportunity Tax Credit

The American Opportunity Tax Credit is designed to assist students and their parents in offsetting educational expenses. This credit allows you to claim up to $2,500 on your tax return. However, it’s important to note that only parents who claim their child as a dependent on their taxes are eligible to claim this credit.

To qualify for the American Opportunity Tax Credit, single households must earn less than $90,000, and married couples filing jointly must earn less than $180,000. It is worth mentioning that this tax credit can only be claimed during the first four years of the student’s college career.

The Lifetime Learning Credit

Similar to the American Opportunity Tax Credit, the Lifetime Learning Credit also provides tax benefits for qualified education expenses. This credit allows you (or your parents, if they claim you as a dependent) to claim up to $2,000 on your tax return.

To be eligible for the Lifetime Learning Credit, students must be enrolled in at least one academic period at an eligible higher education institution. The credit is worth 20% of educational expenses, up to a maximum of $10,000. The income limits to qualify for this credit are a Modified Adjusted Gross Income of $66,000 or less for single filers and $132,000 or less for married couples filing jointly.

It’s important to note that both tax credits require the completion of tax form 8863 in order to claim them.

Student Loan Interest Deduction

Apart from tax credits, students and former students who are paying interest on their student loans may also be eligible for a deduction on their taxes. The student loan interest deduction allows individuals to deduct the lesser of $2,500 or the amount of interest paid during a given tax year from their Modified Adjusted Gross Income (MAGI).

To qualify for this deduction, single filers must earn less than $80,000, and married couples filing jointly must earn less than $160,000. This deduction is particularly beneficial for those who are responsible for the accruing interest on unsubsidized loans or for former students who are now repaying the interest on subsidized loans.


Navigating the world of student loans can be overwhelming, but understanding the tax benefits available can provide some much-needed relief. The American Opportunity Tax Credit, the Lifetime Learning Credit, and student loan interest deduction are valuable tools for reducing the financial burden of higher education.

Be sure to consult with a tax professional or utilize tax preparation software to ensure proper filing and maximize your eligible tax benefits.

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