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 As tax time rolls past, you may be wondering if you can take a student loan interest deduction in 2007 or 2008. Maybe you think that you've missed it this year, maybe you have a child that is going to college next year and you're wondering how the interest deductions work. Well, we've got a definitive answer right from the IRS to the question - Can I take a student loan interest deduction on my taxes? Well, maybe.
What Exactly is Student Loan Interest?
Student loan interest is defined as the interest you paid during the calendar year on what is called a qualified student loan. The interest can be both required by the terms of the loan - your normal monthly payments - and any voluntary interest payments you make on the student loan - for example, prepaid interest.
Qualified Student Loans
For the purpose of taking a student loan interest deduction on your federal income taxes, the loan must be associated with the expenses paid to an eligible educational institution. An eligible educational institution is defined as any college, university, vocational school, or any other type of postsecondary educational institution that is eligible to participate in a student aid program administered by the Department of Education.
A qualified student loan is one that was taken out to pay for the expenses associated with attending school. Expenses can include:
- School tuition and fees
- Room and board
- Books, supplies and equipment necessary to attend class
- Other necessary expenses, including transportation expenses including student airfare
If you're residing off campus then the allowance for room and board cannot be larger than the actual amount charged to live on campus or any amount that was included as part of attending school. In other words, if the student lives in a luxury apartment that is twice the cost of campus living, that portion of student loan would not be eligible to deduct.
Student Loan Deduction Rules
We've read a lot of the IRS rules that apply to different programs and it seems to us that they attempt to balance simplified rules with fairness to taxpayers. Often this gets complicated by all of the real life scenarios that can take place. That being said, here is a summary of the most important student loan deduction rules:
- Maximum Deduction - qualifying taxpayers can take up to a maximum of $2,500 deduction on their taxes for student loan interest payments.
- Qualifying Rules - to qualify for a deduction, the student loan must have been taken out for the sole reason of paying for qualified education expenses. In addition, the interest payment cannot be made from a related person or come from a qualified employer plan.
- Qualifying Students - in order for a student to take a deduction, the student loan must be for you, your spouse or a person you claim as a dependent. The student must also be enrolled at least half time in a qualifying program.
Double Tax Deductions
The second rule above is in place to prevent taxpayers from taking a double deduction on their taxes for student interest. For example, if you pay your all or some of your student loan using tax free distributions from a Coverdell education savings account (ESA), then you need to reduce the deductible portion of the interest payment to account for the tax free distribution.
In the same manner, you must reduce your qualified education expenses by the amounts paid for by employer grants, US Savings Bonds, scholarships, student grants, or any other non-taxable payment or gift you used or received to help pay the student loan.
The qualifying rules can also be translated in this way. You cannot claim interest deductions for a student loan if you are claimed as a dependent by another taxpayer or you are not legally obligated to make payments on the loan.
Phase Outs and Limits of Student Loan Deductions
The limit or maximum that you can deduct on your taxes for a student loan is $2,500. But even if you qualify for a deduction, there is a phase out schedule that is based on your modified adjusted gross income or AGI. Generally, the phase out starts when your AGI is over $50,000 ($100,000 married filing jointly) and the phase out ends when your AGI is over $65,000 ($130,000 married filing jointly).
The exact phase out schedule for student loan deductions is shown in the table below:
Student Loan Tax Deduction Phase-Out
| Tax Filing Status |
AGI |
Interest Deduction |
| Single, head of household, qualifying widow(er) |
Less than $50,000 |
Full deduction |
| More than $50,000 but less than $65,000 |
Reduced deduction |
| More than $65,000 |
No deduction |
| Married filing jointly |
Less than $100,000 |
Full deduction |
| More than $100,000, but less than $130,000 |
Reduced deduction |
| More than $130,000 |
No deduction |
Interest Deduction Tax Forms
If you've paid more than $600 on a qualified student loan, then the lending institution - whether it be a financial institution, private lender, government agency, a college or university or any other creditor - will send you a Form 1098-E - Student Loan Interest Statement. Exact calculations for student loan interest deductions and the associated income tax forms can be found in the IRS Form 1040 instructions worksheet on the IRS website.
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