Parent PLUS Loan Tax Deduction: How It Works

#1 Student loan lawyer

Updated on October 9, 2023

Parent PLUS Loan Tax Deduction—have you considered how it could benefit you? If you’re a parent who’s taken out a Parent PLUS loan to support your child’s higher education expenses, you have a chance to reduce your tax bill for the tax year through this specific deduction, potentially saving up to $2,500 per year. But navigating the process might feel overwhelming without guidance.

Ahead, we’ll simplify the journey by exploring:

  • Maximizing Opportunities: Learn how the student loan interest tax deduction on Parent PLUS loans can put money back in your pocket.

  • Avoiding Pitfalls: Navigate the complexities with clear guidance so you don’t miss out on potential savings.

  • Understanding Eligibility and Calculation: Demystify the criteria and calculation to make claiming the deduction a breeze.

  • Exploring Refinancing Options: Discover how refinancing might further reduce your loan amount and offer better Parent PLUS Loan repayment options.

Whether you’re seeking clarity on how to qualify or looking to make the most of your investment in education, this guide offers step-by-step insights to help you unlock the tax benefits for education related to Parent PLUS loans.

Understanding Parent PLUS Loan Tax Deductions: Eligibility and Limits

Parent PLUS Loans offer a unique opportunity to reduce your taxable income. Here’s what you need to know:

What Are Tax Deductions for Parent PLUS Loans?

You can subtract amounts from your taxable income, specifically up to $2,500 per year in interest paid on the loan. This lowers your federal income tax, potentially reducing your tax liability.

Eligibility Criteria

  • Filing Status: Eligible unless you filed married filing separately.

  • Dependent Status: No one else should claim you as a dependent for that tax year.

  • Legal Obligation: Must pay interest on a qualified student loan.

  • Interest Payment: Must have paid interest on a qualified student loan during the year.

Deduction Details

  • Amount: The lesser of $2,500 or the actual interest paid.

  • Full Deduction Example: Full $2,500 deduction if your Modified Adjusted Gross Income (MAGI) is $145,000 or less (for Married Filing Jointly). MAGI is your total gross income minus certain deductions, used to determine eligibility for tax benefits.

  • Phaseout Example: Partial deduction if MAGI is between certain limits, such as $75,000 for Single filers. Example: If MAGI is $75,000, you might be eligible for a partial deduction instead of the full $2,500.

  • Claiming Method: No need to itemize; claim as an adjustment to income.

  • Tax Bracket Impact: For a 22% tax bracket, claiming $2,500 would put $550 back in your pocket.

Deduction Limits Based on Income

  • Married Filing Jointly: Full $2,500 if MAGI is $145,000 or less. Gradual reduction up to $175,000, then no deduction.

  • Single, Head of Household, Qualifying Widow(er): Full $2,500 if MAGI is $70,000 or less. Reduction between $70,000 and $85,000, then no deduction.

Relate: When Do Parent PLUS Loans Get Disbursed?

How to Claim Parent PLUS Loan Tax Deduction

Claiming the Parent PLUS Loan Tax Deduction is straightforward, allowing eligible borrowers and cosigners to reduce their taxable income.

Here’s a step-by-step guide to ensure you qualify and know how to claim the student loan tax deduction:

Step #1: Obtain Form 1098-E from Your Student Loan Servicer

  • Eligibility: If you paid over $600 in student loan interest, you’ll receive this form from the IRS.

  • Missing Form: Call your student loan servicer if you didn’t receive it by mid-February, or if you paid less than $600, ask about the amount paid.

  • Unknown Servicer: If you’re unsure who your servicer is, find them on

Step #2: Report Interest on Schedule 1 (Line 21) Form Details:

Enter the loan interest deductible under Part II of your Schedule 1, part of Form 1040.

Above-the-Line Deduction: This deduction is taken before the standard or itemized deductions.

Step #3: Complete Your Tax Return Fill Out Form 1040:

Report all adjustments to income and complete your tax return.

Accuracy Check: Double-check your numbers and review forms your student loan servicer provided for accuracy.

Additional Considerations:

  • No Need to Itemize: The deduction is claimed as an adjustment to income, accessible to most borrowers.

  • Refinanced Loans: If you refinanced with a private lender, ask them for the form, or check your lender’s website for interest details.

  • Interest Paid in 2023: Even with federal interest rates at 0%, you can still deduct any interest paid if you qualify.

By understanding your eligibility and following these steps, you can confidently claim the Parent PLUS Loan Tax Deduction, potentially saving on your taxes and putting more money back in your pocket.

How to Choose Between Federal Tax Credits and Interest Deductions

When funding college costs through education loans, your ability to use tax benefits or tax breaks can make a significant difference in your overall personal finances.

But how do you select the right ones for your situation, especially for an eligible student?

This guide helps you navigate the complex landscape of educational tax credits and deductions.

Understanding Different Tax Benefits Related to Parent PLUS Loans

When considering the Parent PLUS Loan Tax Deduction, it’s essential to recognize how it fits within the broader landscape of educational tax benefits. Here’s what you need to understand:

  • Income Limits and Phaseouts: Each tax benefit, including the Parent PLUS Loan Tax Deduction, has varying income limits and gradual reductions known as phaseouts, affecting your eligibility.

  • Eligible Expenses: While some benefits cover specific educational expenses, the Parent PLUS Loan Tax Deduction focuses on the interest paid on the loan itself.

  • Amount of Tax Savings: Compare the potential savings from the Parent PLUS Loan Tax Deduction to other benefits to determine the best option for your situation.

  • Number of Years the Benefit Can Be Claimed: Consider how long you will need the benefit, such as the Parent PLUS Loan Tax Deduction, which you can claim as long as you pay interest on the loan.

  • Filing Status Requirements: Ensure that you meet specific filing status requirements for the Parent PLUS Loan Tax Deduction, as different benefits may have varying requirements.

Two Common Educational Tax Benefits Compared

  • American Opportunity Tax Credit (AOTC): Generally more valuable, offering up to $2,500 per student, limited to four years.

  • Lifetime Learning Credit (LLC): Offers up to $2,000 per return, unlimited years, but may provide less savings.

Example: If you have two children in college, AOTC might offer more immediate savings. But if you’re pursuing lifelong learning, LLC might be more suitable.

Interactions with Parent PLUS Loan Interest Deduction

The Parent PLUS Loan Interest Deduction, which allows borrowers to deduct up to $2,500 per year in interest, interacts with other educational tax benefits uniquely:

  • Combining with Other Benefits: This deduction can be claimed with AOTC or LLC as long as expenses are different.

  • Consider Tax Outcome for Parents and Students: Analyze the combined tax benefit, and be aware of income limits or phaseouts.

  • Income Limits and Phaseouts: Different benefits have varying limitations; be mindful of these as they affect eligibility.

Common Errors and Misconceptions

Beware, taxpayer! The student loan interest deduction for Parent PLUS Loans might seem simple, but certain pitfalls can lead to mistakes. Here’s what you need to know to avoid common errors:

  • Income Limits and Phaseouts: Review the specific income restrictions and phaseouts for the deduction to ensure you qualify. Ignoring these limits can lead to missed opportunities or incorrect claims.

  • Eligibility Mistakes: Ensure you don’t miss out on a rightful deduction if you meet the criteria, and verify that you meet the eligibility rules before claiming the deduction.

  • Misunderstanding Eligible Expenses: Confirm that the interest paid on the Parent PLUS Loan or private student loans is eligible for the deduction. Not all interest payments, such as those on a personal loan unrelated to education, may qualify.

  • Providing Incorrect Information to the Loan Servicer: Accuracy matters when obtaining Form 1098-E from your student loan servicer. Ensure that you provide the correct information to receive the appropriate form.

  • Confusion About Loan Terms: Understanding the loan term and how it affects your monthly payment and loan balance can explain the total amount of interest eligible for deduction.

  • Mistaking Other Financial Products: The deduction specifically pertains to interest on education loans, not other financial products like credit card interest.

For further details, refer to the IRS publication on education loan interest deductions, and consult a personal finance expert if needed.

Save Even More Money by Refinancing

The student loan interest deduction can provide a significant boost to your tax refund. Still, you may find additional savings by choosing to refinance your parent loans, including private loans. Here’s a look at how refinancing might affect your student loan debt, interest, and loan repayment options:

  • Potential Savings with Refinance: If your financial position has improved since taking out the original direct loan, refinancing could significantly reduce your loan amount’s interest, saving you thousands over the life of the loan. This could also contribute to your college savings.

  • Refinance Requirements: To qualify for the best interest rates and loan repayment options, you’ll need a good credit score (720 or above) and sufficient income or a cosigner who meets these criteria. Self-employed individuals may also qualify with proper documentation.

  • Loan Repayment Options and Considerations: Refinancing may offer more flexible student loan payments options, including grace period terms, but know that refinancing federal student loans with a private lender will cost you access to federal protections like income-driven repayment plans, extended forbearances, and deferments, and loan forgiveness programs administered by the Department of Education.

  • Next Steps to Refinance: Explore various lenders, compare refinance offers, assess how different loan repayment options align with your goals, and consider consulting a financial professional to ensure refinancing is the right move for you.

Bottom Line

Maximize your savings with the Parent PLUS Loan Tax Deduction and confidently navigate the financial path to higher education. Stay informed with our latest insights, tips, and updates by signing up for our newsletter today. We’ll help you maximize your investment in your child’s future.

Share On Social

Stop Stressing