Federal student loan borrowers caught a break on payments this year, but what does it mean come tax season? Here’s what you need to know.

Thanks to early pandemic relief efforts, millions of Americans have caught a break on student loan payments over the last year. 

It’s a chance for borrowers to focus on more pressing financial matters while the economy — not to mention employment — recovers from the COVID-19 pandemic.

You are not alone if you are worried about how the student loan freeze will affect your annual tax bill. Fortunately, if you took advantage of the payment pause, it won’t mean an increase in taxes. In most cases, you’re probably due a valuable deduction instead.

The student loan payment freeze

How The Student Loan Freeze Impacts Your Taxes - The student loan payment freeze

Under the CARES Act — which was passed back in March 2020 — borrowers with federal student loans could stop making monthly payments through September 30, 2020. That deadline was pushed back several times, and in January, President Biden extended the deadline once again. 

Now, borrowers with federal student loans won’t need to make payments until at least October 2021, bringing the student loan pause up to about 18 months total. 

To be clear: the freeze only applies to federal loan borrowers. Americans with private student loans — which amount to more than 8% of total outstanding student loan debt in the U.S. — aren’t eligible for the payment pause and have continued making payments as normal.

For federal borrowers, though, it’s been a welcome break, freeing up cash flow and reducing financial stress considerably for the past year. 

Will you pay taxes on the paused amount?

The short answer is no; if you took advantage of the federal loan payment pause, you do not have to pay taxes on the skipped amount. 

That’s because the payment pause is what’s called a loan forbearance — an arrangement that allows you to temporarily stop making payments due to hardship or some other extenuating circumstance, like a pandemic, for instance.

With a forbearance, those skipped payments aren’t forgiven or erased; they’re simply delayed, and you’ll still have to pay them back at a later date. The payments may be added to the end of your loan term, or you might make higher monthly payments once the freeze ends (the exact plan will depend on your servicer and unique situation, though). 

Spoiler: you might actually qualify for a deduction

How The Student Loan Freeze Impacts Your Taxes- Spoiler: you might actually qualify for a deduction

If that wasn’t good enough news, I’ll do you one better. Despite taking a break from your payments, you could actually be due a deduction come tax day.

It’s true: because of the CARES Act’s timing, you probably made at least a few student loan payments last year (most likely January through March). If you did, those payments would qualify you for a valuable deduction called the student loan interest deduction.

The Student Loan Interest Deduction lets you deduct the interest you paid on student loans from your taxable income. So if you made $50,000 last year and paid $1,250 in student loan interest between January through March, you’d only pay taxes on $48,750 of that income ($50,000 minus $1,250).

If you have private student loans, you’d likely see an even bigger deduction. Since private student loans don’t qualify for the payment pause, most borrowers have been making their monthly payments as scheduled. Compared to federal borrowers, it likely means a much bigger deduction — 12 months of interest versus three months, in most cases.

How much student loan interest can you deduct?

Unfortunately, you can’t always deduct all the student loan interest you paid in the last calendar year, as the IRS caps this deduction at $2,500. 

So, if you paid $4,000 in interest in 2020, you could only deduct the first $2,500 from your income. If you paid $2,000 in interest, though, you’d be able to write the entire bill off, granted you meet the proper requirements. 

There are also what the IRS calls “phaseouts,” which reduce your deduction based on your household income and tax filing status. Essentially, the more money you make, the less interest you can deduct. If you make too much money (over $85,000 for single filers and $170,000 for married couples), then you can’t take the deduction at all.

Qualifying for the student loan interest deduction

How The Student Loan Freeze Impacts Your Taxes - Qualifying for the student loan interest deduction

To qualify for the student loan interest deduction, there are a few requirements you’ll need to meet first. For one, your loans must have been taken out only for educational purposes and used at an eligible educational institution — meaning one that participates in the Department of Education’s student aid program. 

You’ll also need to file your taxes either as a single filer, head of household, qualifying widower, or a married couple filed jointly. IRS rules stipulate that if you’re married but file your returns separately, you won’t be eligible. If you’re claimed as a dependent on someone else’s tax returns — like your parents, for example, you can’t claim it either (though they can.)

Additionally, there are also income caps you will need to fall under. These caps also influence your total deduction. Here’s how that breaks down by tax filing status:

2020 tax filing statusModified adjusted gross income for 2020Total student loan deduction
Single filer, Head of household, or Qualifying widower
$70,000 or lessFull $2,500 deduction

Single filer, Head of household, or Qualifying widower
$70,001 to $85,000Slightly reduced deduction
Single filer, Head of household, or Qualifying widower
$85,001 or moreNo deduction
Married filing jointly

$140,000 or lessFull $2,500 deduction
Married filing jointly

$140,001 to $170,000Slightly reduced deduction
Married filing jointly

$170,001 or moreNo deduction

If you fall in the “slightly reduced” bucket, the IRS has a worksheet to help you determine exactly how much you can deduct for any given year. It basically depends on how much you go over that $70,000 or $140,000 mark.

Summary

The student loan payment freeze has been a welcome break for many borrowers, and tax day shouldn’t change that. In fact, if you took advantage of the pause, there’s a good chance you’re still due valuable deductions, which can reduce your taxable income and increase that final refund.

If you’re unsure about how your student loans affect your taxes — or you need help filing your returns — reach out to a qualified tax professional or financial advisor for help. They can make sure you’re on the right track.

Read more:

Related Tools

About the author

Aly J. Yale
Total Articles: 7
Aly J. Yale is a freelance writer, specializing in real estate, mortgage and the housing market. Her work has been published in Forbes, Money Magazine, Business Insider, Bankrate, The Motley Fool, The Balance, and more. Prior to freelancing, she served as an editor and reporter for The Dallas Morning News. She graduated from TCU’s Bob Schieffer College of Communication with a focus on radio-TV-film and news-editorial journalism. See her work at AlyJYale.com or connect with her on Twitter or LinkedIn.