Student Loan Interest Deduction

"Student Loan Interest Deduction" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 25th July 2011

Table of Contents

Qualified individuals are able to deduct a portion of their education loan interest up to $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001, and after. This deduction is an adjustment to income and can reduce the amount of your income subject to tax by up to $2,500 in 2009. Student loan interest is interest paid during the year on a qualified student loan used for higher education. It includes required and voluntary interest payments.

This Interest Deductibility is a government sponsored tax benefit for borrowers in repayment on their federal student loans. A borrower may be able to claim a tax deduction on the amount of interest he/she has paid during the year. Some private loans offer this benefit as well.

Student borrowers or their families can deduct student loan interest payments from their taxable income. The deduction is available even if you do not itemize other deductions. The loan does not have to be federally guaranteed or subsidized to be eligible for the deduction, but it must be used to pay education expenses such as tuition, fees, books, and room and board. The maximum deduction is $2,500. The AGI limit for the full interest deduction is $50,000 for single filers, phasing out at a maximum of $65,000, and $105,000 for joint filers, phasing out at $135,000. Voluntary interest payments may be deducted.

Interest paid during the first 60 months (5 years) of scheduled repayment may be deductible. Deductions for student loan interest may be made for interest due and paid after 1997.

The tax credit is available for individuals with modified AGI under $40,000 and is phased out between $40,000 and $55,000. Joint filers with modified AGI under $60,000 (phased out between $60,000 and $75,000) are eligible for the deduction as well.

Qualification

An eligible taxpayer must:

have paid interest on a loan that was used solely to pay qualified education expenses2 that were for you, your spouse or a dependent when you took out the loan; paid or incurred within a reasonable period of time before or after you took out the loan; and for higher education provided to an eligible student during an academic period.

If the student is legally liable for the student loan, makes the interest payments on the loan during the tax year and is not claimed as a dependent by another taxpayer, he or she can claim the student loan interest deduction.

You cannot claim the student loan interest deduction if:

The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($120,000 and $150,000 if married, filing jointly).

How do you get it?

Generally, you can claim the student loan interest deduction if all four requirements are met:

  1. You paid interest on a qualified student loan,
  2. No one else is claiming an exemption for you on his or her tax return,
  3. Your filing status is not “married, filing separately,” and
  4. You meet the income requirements outlined above under “Qualifying.”

Your student loan interest deduction is generally the smaller of $2,500 or the interest paid in 2009. In addition to simple interest on the loan, the following can be considered student loan interest:

When is it available?

The benefit is available for each tax year in which you paid interest on a qualified student loan. You can deduct all interest paid during the year on your student loan, including voluntary payments, until the loan is paid off.

Can a family claim multiple benefits?

You cannot deduct as student loan interest any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

You must reduce your qualified education expenses by the amount paid for them with any tax-free items, such as employer-provided education assistance; veterans’ education assistance; or tax-free distributions from a Coverdell Education Savings Account (ESA) or qualified tuition program (QTP). For more details, visit www.irs.gov and see Tax Topic 456.

Note: Qualified education expenses are tuition, fees, room, board, books, supplies, equipment and other necessary expenses such as transportation.

For Your Information (FYI):
This information’s covers a variety of important tax topics related to higher education. It is intended for your educational use and not as legal or tax advice; it does not cover every facet or the full scope of this subject. We highly recommend that you consult a professional tax advisor or attorney and encourage you to visit the Internal Revenue Service Web site, where you will find the complete text of various relevant IRS publications.

IRS Publications

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