Information on Tax Deduction of Student Loans

Most individuals take out loans to pay for college. You can take a deduction for these loans when you use them to pay for college and when you pay them back. Credits are amounts that reduce the amount of taxes you owe, while deductions reduce your amount of taxable income.

Student Loan Interest

If your loan was taken out to cover higher educational expenses, you can deduct the interest you pay on the loan if your adjusted gross income is less then $75,000 for singles or $150,000 for couples filing jointly. The maximum deduction is $2,500 as of 2009.

Loan Cancellation

If your loan is from the government, a school or other tax-exempt company and your loan is canceled, you do not have to report the loan repayment as income.

Lifetime Learning Credit

The Lifetime Learning Credit can be taken if you use student loans to pay for tuition. This credit is worth 20 percent of the expenses up to $2,000. You cannot take this credit if you take the Hope Credit or the Tuition Deduction.

Hope Credit

If you take out student loans and use them for tuition, you can claim a tax credit up to 100 percent of your first $2,000 in expenses and 25 percent of the next $2,000 for a total credit of $2,500. You cannot take this credit if you take the Lifetime Learning Credit or the Tuition Deduction.

Tuition Deduction

If you do not take the Hope Credit or Lifetime Learning Credit, you can deduct the first $4,000 of a loan that is used for educational expenses.

References

• IRS Educational Expenses Deductions
• College Tax Breaks Explained
• Hope Credit