Deducting Student Loan Interest

We are frequently asked if you can deduct the interest you pay on your college loans. You can, subject to certain limits. This deduction is a departure from the general rule that interest on “personal” loans isn’t deductible (except, in most cases, for mortgage interest on your home). Here are the requirements for deductibility: The maximum amount of interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, as explained below.

The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify. Thus, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.

It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

In 2009 and 2010, the student loan interest deduction is phased out for taxpayers who are married filing jointly with AGI between $120,000 to $150,000 ($60,000 to $75,000 for single filers). The deduction will be unavailable for 2009 and 2010 for taxpayers with AGI of $150,000 ($75,000 for single filers).

Married taxpayers must file jointly or no deduction is allowed.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, in the typical situation where a parent is paying for the college education of a child whom the parent is claiming as a dependent, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child/student may pay on a loan the student may have taken out. The child could claim the deduction for interest paid in a later year, when he or she is no longer a dependent.

Where a deduction is allowed, it’s taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.

Other requirements. The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers must keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem, but care should be taken to document other qualifying expenditures such as for books, equipment, fees, and other education-related costs such as transportation.

Documenting room and board expenses should be straightforward for the most part for students living and dining on campus. But where the student lives off campus, records of room and board expenses should be maintained, especially when there are complicating factors such a roommates involved.

Note that we help parents with a college-bound high school student, who won’t qualify for need-based financial aid, reduce their college expenses by thousands of dollars.  In many cases our customized planning results in a family knocking off a full year’s cost of college.  Please call us for more information.


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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