If you’re among the tens of millions of Americans carrying student loan debt, here is a piece of news worth pausing on before you finalize your 1040 return: you may be able to deduct up to $2,500 of the interest you paid in 2025. The student loan interest deduction has been part of the tax code for over two decades, yet it remains one of the more misunderstood breaks available to individual filers. And with a sharp rise in delinquency rates making headlines, the stakes around student loan finances have never felt higher.

A February 19, 2026 report by CNBC’s Annie Nova highlighted that the Trump administration is now pressing hundreds of colleges on their students’ loan repayment rates, warning that institutions with high default rates could lose eligibility for federal student aid programs.¹ The U.S. Department of Education’s data shows that more than 1,800 higher education institutions have nonpayment rates of 25% or higher. All of this underscores a simple point: student debt is a crisis-level issue for millions of individuals and families.

The student loan interest deduction lives in IRC §221. Taxpayers will need to report it on Schedule 1 of their Form 1040. Crucially, it is an above-the-line deduction — meaning you can claim it even if you take the standard deduction and never touch Schedule A.

Here are the key eligibility requirements for the 2025 tax year:

•      The loan must have been taken out solely to pay qualified higher education expenses — tuition, fees, room and board, and related costs.

•      The loan must be in your name, your spouse’s name, or your dependent’s name. You cannot deduct interest on a loan taken out by someone else, even if you made the payments.

•      You must have been enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

•      You cannot be claimed as a dependent on someone else’s return for the year in question.

•      Your filing status cannot be Married Filing Separately.

Your lender or loan servicer is required to send you a Form 1098-E if you paid at least $600 in interest during the year. If you paid less than $600, check your loan servicer’s online portal — the interest figure should still be available, and it’s still deductible even without the form.

The income phase-out is where things get complicated for many borrowers. For the 2025 tax year, the deduction begins to phase out at adjusted gross income (AGI) of $75,000 for single filers and $155,000 for married filers. It phases out completely at $90,000 for single filers and $185,000 for joint filers. These thresholds are adjusted annually for inflation under rules of Treas. Reg. §1.221-1(d) so double-check that you’re looking at 2025 figures and not those from a prior year.

For anyone in the phase-out range, the actual deductible amount is reduced proportionally. The IRS provides a worksheet in the instructions for Schedule 1 (Form 1040) to compute the precise figure.² If your AGI is above the applicable threshold, the deduction is simply off the table — no workaround, no partial credit.

One more nuance worth knowing: only interest is deductible — not principal payments, origination fees, or service charges. However, certain loan origination fees and capitalized interest (interest that gets added to the principal balance during deferment or forbearance) may qualify as deductible interest under the IRS rules. Again, your 1098-E is your best starting point.

The mechanics of claiming the deduction are relatively straightforward:

•      Gather your Form 1098-E from each loan servicer working on behalf of the U.S. Department of Education. If you have multiple servicers (Mohela, Nelnet, Aidvantage, Edfinancial, etc.), you’ll need a form from each one.

•      Add up the total interest paid across all loans, capped at $2,500.

•      Complete the student loan interest deduction worksheet in the Schedule 1 instructions if your income falls within the phase-out range.

•      Enter the deductible amount on Line 21 of Schedule 1 (Additional Income and Adjustments). This flows to Line 10 of your Form 1040 and reduces your adjusted gross income.

Note that if you were on an income-driven repayment (IDR) plan, in forbearance, or in a deferment period during any part of 2025, you may have paid less interest — or none at all — which would reduce the deduction accordingly. Unpaid, accrued interest that was not actually paid during the year is not deductible.

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Context matters here. The February 19th CNBC reporting by Annie Nova paints a sobering backdrop for the student loan interest deduction: more than 1,800 colleges have student loan nonpayment rates of 25% or higher.¹ The Department of Education is now warning those institutions that chronic default rates could cost them federal financial aid eligibility entirely. This matters for individual borrowers because it reflects just how widespread repayment struggles have become.

According to recent data from The Century Foundation, nearly 25% of student loan borrowers with a payment due are now behind, compared with around 9% in 2019.³ A separate report from the Federal Reserve Bank of New York found that 9.6% of student loan balances were 90+ days delinquent at the end of 2025.⁴ For borrowers navigating those challenges, the student loan interest deduction may feel modest — but a $2,500 deduction is real money, particularly for those in lower tax brackets where every dollar of adjusted gross income reduction counts.

There’s also a “Catch-22” situation worth flagging: if you were seriously delinquent and your loan was transferred to the Department of Education’s Default Resolution Group — as happened with approximately one million borrowers in Q4 2025 alone — it’s possible your servicer may not send a 1098-E, or the form could reflect unusual interest amounts. In that situation, reaching out directly to the servicer or the Department of Education before filing is probably a good call.

The student loan interest deduction is not flashy, but it’s solid, above-the-line relief that reduces your AGI whether you itemize or take the standard deduction. For 2025, the maximum is $2,500, phasing out between $75,000–$90,000 (single) and $155,000–$185,000 (joint) AGI . Gather your 1098-E forms, run the worksheet if you’re in the phase-out range, and report the figure on Line 21 of Schedule 1.

Given the surge in delinquency and the administration’s increased scrutiny of the student loan system, Tax Clarity Newsletter will continue tracking any legislative or regulatory changes that could affect this deduction going forward. Stay tuned.

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References (4)

¹ Annie Nova, Trump administration issues warning to hundreds of colleges with low student loan repayment rates, CNBC, February 19, 2026, accessed February 20, 2026.

² Instructions for Schedule 1 (Form 1040), Student Loan Interest Deduction Worksheet, Internal Revenue Service, 2025, accessed February 20, 2026.

³ Peter Granville, Trump’s Student Loan Delinquency Crisis, Unmasked, The Century Foundation, February 2026, accessed February 20, 2026.

⁴ Household Debt and Credit Report, Q4 2025, Federal Reserve Bank of New York, February 2026, accessed February 20, 2026.

DISCLAIMER: The information in this newsletter is derived from public information, provided for education purposes. It is not provided as a financial advisory service and should not be relied upon as such. For advice on a specific tax matter, please consult a tax professional.