How Does the 1098-E Affect Taxes: Savings, Limits, Forgiveness

Form 1098-E affects your taxes by reporting the student loan interest you paid during the year, and that interest can be subtracted from your income through the student loan interest deduction, up to a maximum of $2,500 per return. Because it’s an above-the-line adjustment, you get the benefit whether you take the standard deduction or itemize. Your actual dollar savings depend on your tax bracket and whether your income falls within the annual phase-out range.¹

What the Number on Your 1098-E Represents

Your loan servicer sends Form 1098-E if you paid $600 or more in student loan interest during the year.² Box 1 shows the total interest the lender received from you. The IRS gets a copy of the same form, so the figure you put on your return should match what the servicer reported. If it doesn’t match, expect a notice.

Paid less than $600? You won’t get a form, but the deduction is still yours to claim. Log into your servicer’s site or call for the year-end interest total. If you had more than one servicer, pull the figure from each and add them up. You don’t need the physical 1098-E to file; you need the accurate interest number and records to back it up.

How Much the Deduction Actually Saves You

The student loan interest deduction is an adjustment to income, not a tax credit. A credit cuts your tax bill dollar for dollar. A deduction cuts the income your tax is calculated on, so savings scale with your marginal rate.¹ A filer in the 22% bracket claiming the full $2,500 saves roughly $550. The same deduction in the 12% bracket is worth about $300.

The $2,500 cap applies per return, not per borrower. If you and your spouse both have student loans and file jointly, your combined deduction is capped at $2,500, not $5,000.³ That catches a lot of two-borrower couples off guard. If each of you paid $2,000, your joint return still deducts only $2,500 total.

Lowering your adjusted gross income can also help you qualify for other income-based tax items, like Roth IRA contributions and certain credits, so the real benefit sometimes reaches further than the bracket math alone suggests.

Who Can Claim It

Four conditions all have to be true:

You are legally obligated to pay the interest. If a parent took out the loan in their name and you make the payments, you can’t deduct the interest; only the parent can.
No one claims you as a dependent. And if your parents claim you, they can’t deduct the interest either unless they are also legally obligated on the loan.³
You are not married filing separately. MFS filers are barred from the deduction at any income level.³
Your modified adjusted gross income is below the annual ceiling.

2026 Income Limits

For the 2026 tax year:⁴

Single, head of household, or qualifying surviving spouse: full deduction at MAGI of $85,000 or less, partial from $85,000 to $100,000, none at $100,000 or above.
Married filing jointly: full deduction at MAGI of $175,000 or less, partial from $175,000 to $205,000, none at $205,000 or above.
Married filing separately: no deduction.

If you fall inside the phase-out range, the deduction shrinks on a sliding scale. Take the amount your MAGI exceeds the lower threshold, divide it by $15,000 (single) or $30,000 (joint), multiply that fraction by your otherwise-allowable deduction, and subtract the result. A single filer with $92,500 MAGI and $2,500 in interest loses half the deduction and ends up with $1,250.⁵

Where It Goes on Your Return

Report the deduction on Schedule 1 (Form 1040), Line 21.⁶ The Schedule 1 total then carries over to Form 1040 and reduces your AGI. No itemizing required.¹

Within the phase-out range, use the Student Loan Interest Deduction Worksheet in the Schedule 1 instructions to compute the reduced amount. Tax software does this automatically once you enter the 1098-E figure. If you’re filing on paper, work the worksheet before you fill in Line 21.

If the amount on your 1098-E looks wrong, ask your servicer for a corrected form before you file. The IRS matching system will flag the discrepancy if you simply override the reported number.

Interest Categories Borrowers Often Miss

The 1098-E figure includes more than the regular monthly interest on your statement. Two items worth checking:

Capitalized interest. When unpaid interest gets rolled into your principal, it becomes deductible as you make payments on the larger balance. The exception: you can’t deduct capitalized interest in a year you made no payments.⁵
Loan origination fees. Fees charged for the use of money (as opposed to processing costs) count as interest and accrue over the life of the loan, not just in the year you borrowed.⁵

Voluntary payments count too. If your loans are in deferment or forbearance and you choose to pay interest anyway, those payments are deductible.¹ That’s a decent argument for paying interest during a grace period rather than letting it capitalize.

One Thing the 1098-E Does Not Cover: Forgiveness

The interest deduction has nothing to do with loan forgiveness, and 2026 is a year where that distinction matters. The American Rescue Plan Act’s temporary exclusion of forgiven student loan amounts from taxable income expired on January 1, 2026. Forgiveness received in 2026 through an income-driven repayment plan may now be treated as taxable income at the federal level, whether the loan was federal, institutional, or private.

Some forgiveness remains permanently tax-free: Public Service Loan Forgiveness, discharge due to death or total and permanent disability, and closed-school discharges. A borrower reaching the 20- or 25-year mark on an income-driven plan could face a sizable tax bill in 2026; a PSLF borrower will not. If you’re close to forgiveness, that planning question is far more consequential than the interest deduction on your 1098-E.

1
Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction
2
Internal Revenue Service. 2025 Instructions for Forms 1098-E and 1098-T
3
Office of the Law Revision Counsel. 26 U.S.C. 221 – Interest on Education Loans
4
Internal Revenue Service. Rev. Proc. 2025-32
5
Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
6
Internal Revenue Service. 2025 Schedule 1 (Form 1040)