Borrowers may deduct up to $2,500 in interest payments on federal and private student loans on their federal income tax returns.
The student loan interest deduction is taken as an above-the-line exclusion from income, which reduces the borrower’s adjusted gross income (AGI). Borrowers don’t have to itemize deductions to claim the student loan interest deduction, meaning that they can claim the student loan interest deduction in addition to the standard deduction.
Taxpayers cannot double dip. Taxpayers cannot claim the student loan interest deduction for any amount for which a deduction is allowed elsewhere in the tax code. For example, one cannot claim the student loan interest deduction on the interest paid on a home equity loan, even if the loan is used solely to pay qualified higher education expenses, because one can claim the home mortgage interest deduction.
Married taxpayers must file joint returns to claim the student loan interest deduction. This requirement may interact with the income-based repayment plan, where married taxpayers can choose whether to have monthly loan payments based on their separate or joint income based on the type of income tax return they file.
Technically, the federal or private student loan must have been used to pay for portions of the cost of attendance that were not also used to justify exclusions from income for employer tuition assistance, scholarships, military student aid or distributions from income for qualified education benefits (529 college savings plans, prepaid tuition plans, or Coverdell education savings accounts) or US savings bonds. In practice, this coordination restriction is difficult to enforce because the other education tax benefits may have been received years before the student loan interest deduction is claimed.
Voluntary payments of interest do qualify for the student loan interest deduction, but only if the interest is actually paid by the borrower. If the interest is accrued but unpaid, it cannot be claimed until it is paid. For example, voluntary payment of interest during a partial forbearance or during the in-school and grace periods will qualify for the student loan interest deduction.
Loan origination fees and capitalized interest qualify for the student loan interest deduction, but are amortized over the term of the loan.
The taxpayer must have been legally obligated to make payments on the loan to claim the student loan interest deduction. Any payments made by someone other than the borrower are treated as though they were made by the borrower. For example, if a grandparent makes the loan payments on a grandchild’s student loans, the grandparent does not get to claim the student loan interest deduction unless the grandparent cosigned or endorsed the original loan.
Borrowers who can be claimed as a dependent on someone else’s federal income tax return may not claim the student loan interest deduction. If a student can be claimed as a dependent on her parents’ federal income tax return, she may not claim the student loan interest deduction based on interest she paid, even if her parents opt to not claim her as an exemption. The parents may not claim the deduction based on interest paid by their daughter even if they list her as an exemption on their federal income tax return because the parents were not legally obligated to pay the interest on their daughter’s student loans. However, if the parents cosigned their daughter’s student loans, then the parents would be eligible to claim the student loan interest deduction.
To be considered a qualified education loan, the loan must have been borrowed by the taxpayer solely to pay the qualified higher education expenses of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents. Mixed-use loans, such as credit cards, do not qualify. The student’s status as a spouse or dependent is as of the date the debt was incurred.
The qualified higher education expenses must have been paid within a reasonable period of time before or after the debt was incurred, usually interpreted as occurring during or within 90 days before or after the academic period.
Qualified higher education expenses require the student to have been degree-seeking and enrolled on at least a half-time basis in an institution that is eligible for Title IV federal student aid. Dual enrollment in an elementary or secondary school while simultaneously enrolled at a college or university does not qualify.
A qualified education loan remains eligible for the student loan interest deduction even if it is refinanced, provided that the new loan was used solely to refinance qualified education loans.
Qualified education loans include private student loans, not just federal loans. The loan does not need to have a federal guarantee for the interest to qualify for the student loan interest deduction.
Qualified education loans do not include debt owed to someone who is related to the taxpayer. Loans from qualified retirement plans are also excluded.
Effective with the 2002 tax year, the student loan interest deduction is no longer limited to five years.
The student loan interest deduction phases out for taxpayers who file federal income tax returns with 2013 adjusted gross income (AGI) between $60,000 and $75,000 (single) and between $125,000 and $155,000 (married filing jointly). The 2014 phaseouts are between $65,000 and $80,000 (single) and between $130,000 and $160,000 (married filing jointly). The 2015 phaseouts are unchanged at between $65,000 and $80,000 (single) and between $130,000 and $160,000 (married filing jointly). Married taxpayers who file separate returns are ineligible.
The income phaseouts are adjusted annually after 2002 according to inflation (CPI-U) since 2001, rounded down to the next lowest multiple of $5,000.
The legislation authorizing the student loan interest deduction does not expire.
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