Is the Interest Paid on Student Loans Tax Deductible?
Student loan interest represents a significant amount of educational expense. Although the interest on student loans can be lower than other installment plans, the amount over time can be substantial. Deducting the interest on tax returns is a way to lower costs. Student loans taken before 2001 are not deductible, but interest on loans from 2001 and beyond is deductible, based on a set of criteria from the Internal Revenue Service.
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History
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The Economic Recovery Act of 2001 grants taxpayers the option to deduct student loan interest on tax returns. Student loan interest is defined as the interest paid in a calendar year on a qualified educational loan. The student loan interest deduction is allowable even if deductions are not itemized. The deduction reduces the amount of income subject to tax by up to $2,500. Taxpayers making less than $75,000, or $150,00 for joint filers, are eligible for the deduction.
Qualifications
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Qualifying student loans are loans taken specifically to pay education expenses for the taxpayer or his dependents. Qualifying educational expenses include tuition, room and board, books and miscellaneous fees. Dependents are children, spouses or qualifying relatives. Loans from relatives or employer plans do not qualify as a student loan for deduction purposes. Educational loans must be for education provided during an academic year for an eligible student. The student must have been enrolled at least part time in a degree program.
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Types of Student Loan Interest
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Simple interest on a qualifying student loan is deductible, including voluntary interest payments made before the loan enters repayment status. Also deductible is the loan origination fee that the lender charges when the loan is made. Prior to 2004, loan origination fees were not reported on the Student Loan Interest Statement (Form 1098-E). The IRS allows taxpayers without this form to allocate these fees over the term of the loan using reasonable accounting methods. Lender-issued capitalized interest is considered interest and is deductible. Interest from lines of credit, such as credit cards, used solely for education expenses, is student loan interest, according to IRS guidelines. Interest on refinanced student loans also is deductible.
Who Can Claim
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A taxpayer is eligible for the deduction, unless the filing status is married filing separately. Financial obligation for the loan is required, in addition to interest payments made during the filing tax year. The taxpayer cannot be claimed on any other tax return as an exemption. Income limitations exist for claimants. In 2009, the income cap was $75,000 for single filers and $150,00 for joint returns. The deduction amount phases out gradually as adjusted gross income increases.
Calculating the Deduction
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The deduction is usually the interest paid in the filing year or $2,500, whichever is less. The institution receiving the interest payments mails out a Form 1098-E, which details all interest payments made. This amount is listed on the tax form under student loan interest. Form 1040, 1040A and 1040NR all contain worksheets for calculating the Student Loan Interest Deduction. The modified adjusted gross income affects the amount of the deduction due to income level phaseouts. The worksheets include the amounts needed to accurately calculate the interest deduction.
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