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Student Loan Interest Deduction

Mark Kantrowitz

May 18, 2009

Student Loan Interest Deduction

Additional Eligibility Restrictions

To take the deduction, you must not be claimed as an exemption on someone else's tax return.

The person for whom the expenses were incurred must have been enrolled at least half-time in a degree program.

The IRS regulations clarify that only the person legally obligated to repay the education loan may take the interest deduction. If someone else makes payments on a student's education loans, the student gets to take the deduction, not the other individual. For example, if a grandparent helps the student out with a few loan payments, the student takes the deduction, not the grandparent. These payments are treated as though they were first paid to the student, and then by the student to the lender.

Coordination Restrictions

You cannot take the deduction when the expenses were paid using certain tax-free education benefits, such as employer education assistance, tax-free withdrawals from a Coverdell Education Savings Account, US savings bond interest, veterans educational assistance benefits, and certain scholarships.

You cannot double-dip, meaning that if the interest is deductible elsewhere on the return (e.g., home mortgage interest), you cannot also deduct it as student loan interest.

Income Phaseouts

The deduction is phased out for taxpayers with adjusted gross incomes of $55,000 to $70,000 (single filers) and $115,000 to $145,000 (married filing jointly). (These are 2008 income phaseouts.)

Taxpayers who are married but filing separate returns are not eligible.

Parents who do not qualify because of the income phaseouts should consider having their child borrow the funds. Not only does the Stafford Loan have a lower interest rate than the PLUS loan, but the student is less likely to exceed the income phaseouts.

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