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The deduction for interest paid on a student loan is one of several tax benefits for education. It is a special deduction that can be taken on your U.S. federal income tax return as an adjustment to income. The deduction reduces your income subject to tax, and you do not need to itemize in order to take this deduction.

Who Qualifies for the Deduction?

You qualify for the student loan interest deduction if you paid interest on a student loan that was used to pay higher educational expenses for a qualified student. The student loan can be for you, your spouse, or dependent.

You can claim the deduction for student loan interest if you meet all four of the following requirements:

  • 1. Your filing status is any status except married filing separately,
  • 2. No one else is claiming an exemption for you,
  • 3. Your modified adjusted gross income is less than the maximum allowable amount before phase-out (this amount is doubled if married filing jointly),
  • 4. You paid interest on a qualified student loan.
Provided you are the person legally obligated to make the interest payments, you may be able to deduct an interest payment made by someone else.

If the student is your dependent, you can deduct interest paid on a student loan only if:

  • 1. You are the person legally obligated to make the interest payments,
  • 2. You actually made the payments during the tax year, and
  • 3. You claim an exemption for your dependent on your tax return.
To qualify, the loan cannot be from a related person or from a qualified employer plan. For these purposes, a related person is the student’s:

  • Spouse
  • Brothers and sisters
  • Half brothers and half sisters
  • Parents, grandparents, etc.
  • Children, grandchildren, etc.
  • Certain corporations, partnerships, trusts, and exempt organizations

Who is an Eligible Student?

The person for whom the expenses were paid must have been an eligible student, defined as follows:

The student was enrolled in a degree, certificate, or other program (including a program of study abroad) leading to a recognized educational credential at an eligible educational institution and The student carried at least half the normal full-time workload for the course of study he or she was pursuing.

Being enrolled at least half-time means carrying at least half of what the eligible educational institution would consider a normal work load for the student’s course of study. This can vary from one educational institution to another.

What Educational Expenses Must Be Paid with the Loan Proceeds?

For purposes of the student loan interest deduction, expenses include:

1. Tuition and fees
2. Room and board
3. Books, supplies, and equipment
4. Other necessary expenses, such as transportation.
The cost of room and board qualifies to the extent that it is not more than the greater of:

1. The allowance for room and board as determined by the eligible educational institution and included in the cost of attendance (for financial aid purposes), or
2. The actual amount charged if the student is living in housing provided by the educational institution (on campus, for instance)

Which Educational Institutions Qualify for the Deduction?

The expenses must be for education in a degree, certificate, or similar program at an eligible institution. An eligible educational institution is any college, university, vocational school, or other postsecondary education institution eligible to participate in a student aid program administered by the U.S. Department of Education. Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs and would qualify for purposes of the student loan interest deduction.

What is the Time Period for Paying Educational Expenses?

In order to be a qualified student loan for purposes of deducting interest payments, the proceeds of the loan must have been used to pay qualified higher education expenses within a reasonable period of time before or after you took out the loan. Student loans that are part of a federal student loan program meet this requirement.

The reasonable period of time condition is generally considered to be satisfied if both of the following requirements are met:

1. The expenses relate to a specific academic period, and
2. The loan proceeds are disbursed within a period that begins 90 days before the start of the academic period and ends 90 days after the end of the academic period. This is sometimes referred to as the “safe harbor” period.

An academic period, for this purpose, can be a semester, trimester, quarter, or summer school session.

The period for deducting interest paid on a student loan is the remaining period of the loan, including after the student has graduated.

How To Claim the Deduction

You should receive Form 1098-E, showing the amount of interest you paid on the student loan. You can include as interest: loan origination fees, capitalized interest (unpaid interest added to the outstanding principal balance), interest on revolving lines of credit, interest on refinanced student loans, and voluntary interest payments.

The maximum benefit is a $2,500 reduction of your taxable income. The amount of the deduction you will be able to claim will depend on your income level. There is a phase-out of the deduction above a certain level of modified adjusted gross income, which is adjusted gross income before taking into account the student loan interest deduction. If the limitation applies, you can use the worksheet in the instructions for Form 1040, or in IRS Publication 970, Tax Benefits for Education, to figure your deduction.

You will have to reduce your interest expense deduction if you paid any of the educational expenses with the following tax-free benefits:

  • Employer-provided educational assistance benefits that are not included in box 1 of your W-2 as taxable compensation.
  • U.S. savings bond interest that you exclude from income because it is used to pay qualified education expenses.
  • Tax-free distributions from qualified state tuition programs
  • Tax-free distributions from Coverdell education savings accounts.
  • Veteran’s educational assistance
  • The tax-free part of scholarships and fellowships
  • Any other tax-free payments received as educational assistance (except for gifts and inheritances)