Rules for claiming the student loan interest deduction

Mar 29th 2011
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Can Mom and Dad get in on the deduction? This article from the National Association of Enrolled Agents explains it all.

The mortgage interest deduction is cherished by many, but the much-maligned student loan is another interest deduction not to be overlooked. Finally, an up-side to the student loan! Unlike the mortgage interest deduction, student loan interest is not taken as an itemized deduction on Schedule A, Form 1040. Instead, it's a modification to adjusted gross income (an above the line deduction). If you meet the requirements, you can deduct the amount of interest paid on a student loan from your total taxable income. And in some cases, parents can even reap the benefit. So, what criteria need to be met in order to take advantage of this tax saving opportunity?

The loan must be taken out solely to pay for qualified education expenses and the lender cannot be an individual - in other words, interest paid to Grandma cannot be deducted. A student who is no longer claimed as a dependent may be able to deduct the interest if his or her Modified Adjusted Gross Income (MAGI, in IRS-speak) is less than $75,000 (or $150,000 if filing a joint return) before subtracting the student loan interest. Two potential disqualifiers should be noted: taxpayers who file their return as married filing separately may not claim this deduction, and the student must be (or have been) enrolled at least half-time in a degree program.

For 2010, the maximum deductible interest per return is $2,500. If you paid $600 or more in interest on a qualified student loan during the year, you should already have received Form 1098-E from the lender. (If not, now's the time to call.) Keep in mind that refinancing the original loan for a higher amount and using even part of the loan money on items other than qualified education expenses will knock you out of the running for this deduction - for the interest to be deducted, a student loan must be used strictly for paying educational expenses.

But what if more than $2,500 went toward payment of interest on your student loans in 2010 and you'd like to see Mom and Dad be able to claim a little of that? First, be aware that parents can't claim a deduction for helping make payments on a loan that is in their child's name. The parents must be personally liable for the loan, but co-signing counts. If the child is no longer a dependent, payments made by the child are deductible by the child and payments made by the parents are deductible by the parents. The eligibility requirements are the same for parents as for students, but if those are met by all, this is a deduction the whole family can love!  

Some states also allow this deduction, so to ensure you reap the maximum value for this and other deductions and credits, be sure to consult a tax professional about preparing your return.

Reprinted from the National Association of Enrolled Agents.

About the National Association of Enrolled Agents (NAEA)
NAEA is the professional society that supports its members with resources, education and networking and by representing their interests to government, business and the general public. Find out more about NAEA and becoming an enrolled agent.

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By Chuck
Jun 26th 2015 01:10

Great article. I have a follow up question though. If I claim my child as a dependent, and we are paying large portions of his student loans while he is in school, and we are co-signers on the loans are we allowed to claim the interest? If yes, then how do we go about doing that? What sort of tax form would we need to get in our name that shows what interest we paid. Or would we use our son's 1098? Lastly, because private student loans have much lower interest rates we are using a private student loan. Is the interest from these loans tax deductible the same way a federal loan is?

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