Higher education has become a necessity, for individuals and our economy as a whole. For families with moderate incomes, borrowing to pay for college has also become a necessity. Student debt is at record levels, and with student loan interest rates rising, more students and families will face unmanageable debt burdens. High student debt relative to income can have costly consequences: it discourages homeownership, public service, family formation, and entrepreneurship; displaces savings for retirement and investment; and at worst, leads to default and bankruptcy.

To help ensure that borrowing for college does not jeopardize families’ financial security, the Project on Student Debt has developed model legislation for a federal student loan interest tax credit. This credit provides more meaningful relief to households with burdensome student debt than the current student loan interest deduction. It rewards work, encourages timely payment, and recognizes family responsibilities.

Key Features

  • Individuals and families with student loans receive a tax credit* on up to $4,000 of the interest they pay each year. The credit replaces the current tax deduction* for up to $2,500 of student loan interest.
  • The size of the credit is based on the borrower’s income, loan burden, and family size.
  • The taxpayer must be working in order to qualify.
  • Loans made to both parents and students are covered, as are both government and private higher education loans.
  • Qualifying loans can cover tuition, room and board, transportation, books and supplies.
  • Eligibility phases out for joint filers with incomes between $100,000 and $140,000, and for single filers with incomes between $50,000 and $70,000.
  • The credit is refundable, so that borrowers get the full credit even when it is larger than the amount of income tax they owe that year.
  • Those who benefit from the current tax deduction will receive as much or more relief from the new credit.

Comparison with Current Tax Treatment of Student Loan Interest

Model Student Loan Interest Credit Current Student Loan Interest Deduction
Value of benefit tied to debt burden (size of loan payments relative to income) Does not take debt burden into account
Helps both middle-income and low-income households Does not help low-income households
Families get larger benefit than individuals Individuals get larger benefit than families
Taxpayer must be working No work requirement
Qualifying Interest: up to $4,000 Qualifying Interest: up to $2,500
Qualifying Loans: government, private, student, parent Qualifying Loans: government, private, student, parent
Phase-out: $100-140k joint, $50-70k single Phase-out: $100-130k joint, $50-65k single

For more details, see the model legislation and section-by-section analysis.

*A credit reduces the taxes you owe, dollar for dollar. A deduction is subtracted from your taxable income: even if it is the same size as a credit, a deduction lowers your taxes by a smaller amount. For example, a $100 credit reduces the taxes you owe by $100. A $100 deduction means that $100 less of your income is subject to taxation; if your tax rate is 25%, the deduction will reduce your taxes by $25. In this model legislation, the value of the credit ranges from 25% to 100% of the interest paid, depending on the borrower’s debt burden.