When it comes to student loans, there’s not too much to love: they’re expensive, they’re potentially confusing, and they get in the way of life goals such as starting a business or buying a home.
And the student loan beast is growing every year. According to Forbes, over 44 million Americans now collectively owe over $1.5 trillion in student loan debt.
But, as with many bad things -- such as dental expenses, property taxes, and disaster losses -- the government just might have some tax breaks for you as you work toward paying off your student loans.
Student Loan Deductions
Unless you’ve been living under a rock, you’ve probably heard about the federal student loan interest deduction.
For the 2019 tax year, you can deduct up to $2,500 of student loan interest paid if you are single and have modified adjusted income at or below $70,000 or if you are married filing jointly with your spouse and have modified adjusted gross income at or below $140,000.
After these income levels, your maximum deductible amount is gradually reduced until you cannot deduct any student loan interest at all if your modified adjusted gross income exceeds $85,000 if you are single or $170,000 if you are married filing jointly with your spouse. Thankfully, your tax software can usually figure out your allowable deduction correctly.
Many states, of course, conform to the federal law regarding the student loan interest deduction, meaning that if you were able to take the student loan interest deduction on your federal return, you could take it on your state return.
Student Loan Credits
Some states, however, go above and beyond for their student loan borrower residents by providing a student loan interest credit.
To understand how valuable this is, you have to understand the difference between a tax deduction and a tax credit.
The actual cash value to you of a tax deduction is the amount of the deduction multiplied by your marginal tax rate. So if your marginal tax rate is 10% and you receive a $500 deduction, the actual cash value to you of that credit is $50.
But the actual cash value to you of a tax credit is the amount of the credit itself: if you receive a $500 tax credit, the actual cash value to you of that credit is $500!
While rare, there are a few states that offer a student loan tax credit rather than a student loan deduction. Below we go over these states and the rules surrounding their credit.
States that Give Student Loan Tax Credits
Maine Educational Opportunity Credit
Maine offers a credit for student loan payments made by residents during the year.
The maximum credit is based on the kind of degree you obtained, and it changes every year. The amounts for 2019 have not yet been released, but below are the maximum credit amounts by degree type for the 2018 tax year:
- For those with an associate’s degree, the maximum credit amount is $888.
- For those with a bachelor’s degree, the maximum credit amount is $4,524.
- For those with a graduate degree, the maximum credit amount is $3,936.
The credit is generally nonrefundable, meaning that you can only take a credit up to your tax liability; you do not get a refund for any credit amount beyond your tax liability. However, for borrowers who obtained a bachelor’s degree in a STEM field, the credit is refundable.
Maryland Student Loan Debt Relief Tax Credit
Marylanders who left college with at least $20,000 in student loan debt and currently have at least $5,000 in student loan debt may be eligible for a state tax credit. Note that these $20,000 and $5,000 amounts include accrued interest.
The credit amount will be different for every student, and unlike many other states, you must apply for the credit, and not every applicant will be awarded the credit. Interested student loan borrowers have until September 15 of each year to apply for the credit with the Maryland Higher Education Commission.
Minnesota Student Loan Credit
Minnesota offers a nonrefundable credit of up to $500 per resident who made payments on their own student loans during the year (so paying off someone else’s student loans doesn’t count).
The state instructs those taking the credit to save canceled checks and keep a log of student loan payments made. Of course, in this modern era of web payments, this can be as easy as going into your student loan issuer’s dashboard and printing out your loan activity for the year.
As mentioned, the credit is per resident, so if both you and your spouse make student loan payments during the year, you may qualify for a combined $1,000 return on your joint Minnesota return.
Rhode Island Wavemaker Fellowship
Similar to the Maryland program, the Rhode Island Wavemaker Fellowship is application-based.
Applicants must work in Rhode Island in a STEM field, and the application committee favors applicants with a strong likelihood to remain in Rhode Island and be a productive member of its economy for the long term.
And similar to the Maine program, the maximum Wavemaker Fellowship award varies by degree obtained:
- For those with an associate’s degree, the maximum award is $1,000.
- For those with a bachelor’s degree, the maximum award is $4,000.
- For those with a master’s degree, the maximum award is $6,000.
How to Take a Student Loan Tax Credit
While most tax software programs are capable of correctly calculating student loan tax credits and deductions, it’s important that you research for yourself the eligibility requirements and how to correctly report the credit or deduction on your tax return. Also, keep in mind that beyond the student loan tax credit, there may be other tax ramifications of having student loans.
Here are some resources for you to consider as you seek to take advantage of student loan tax benefits:
- Your state department of revenue’s taxpayer hotline
- Your state tax return’s instruction book
- A local tax professional
Oh, and one more thing: if your state isn’t listed above, don’t feel left out. There’s a big push right now in a handful of state legislatures to create more tax benefits for student loan borrowers, so be sure to keep your eyes on your local political scene for the latest student loan information.
Guest Author: Logan Allec is a CPA and owner of the personal finance blog Money Done Right. After spending nearly 10 years helping big businesses save money in his role as a tax adviser, he launched Money Done Right with a mission to help everybody — from college students to retirees — make more money, save more money and grow more money. Residing in the Los Angeles area with his wife Caroline, he enjoys hiking, basketball and board games.