Interest on qualifying student loans is deductible. The deduction is an above-the-line deduction so taxpayers do not have to itemize to benefit from the deduction. The maximum amount of interest that a taxpayer may deduct each year is $2,500. The $2,500 limit is the same regardless of how may students are in the taxpayer’s family.
What is a Qualified Education Loan?
A qualified education loan must be taken out to pay qualified higher education expenses (defined below) of the taxpayer, the taxpayer’s spouse, or any dependent of the
taxpayer at the time the debt was incurred to attend either:
- an eligible education institution (generally a college, university, etc.)
- an institution conducting internship or residency programs leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility conducting post graduate training
What Are Qualified Higher Education Expenses
The qualified education loan must be used to pay qualified higher education expenses. Qualified higher education expenses are generally the student’s cost of attending the educational institution, including tuition, fees, room and board, books, equipment, and related expenses.
To qualify as an education loan, the debt must be incurred solely to pay for qualifying educational expenses. Mixed use loans do not qualify. Revolving lines of credit generally will not qualify as a qualified higher education loan; however, if the line of credit funds are used solely to pay qualifying education expenses, the taxpayer may be able to certify the loan as a qualifying educational loan.
Taxpayer Must Be Directly Liable on Loan
Only the taxpayer legally obligated to make interest payments under the terms of the loan can claim the student loan interest deduction. Parents cannot, therefore, claim a deduction for interest on a student loan for which only their child is the borrower. However, were a parent cosigns the loan, the parent and the child are jointly liable on the student loan and the parent is able to deduct the interest the parent paid on the student loan.
Cosigning the loan is required—acting as a guarantor on a student loan will not allow a parent to deduct interest payments on the loan.
For 2014, the student loan interest deduction is phased out as modified AGI moves from $130,000 to $160,000 for joint filers and $65,000 to $80,000 for single and head of household filers.
If you have any questions on how this applies to you, please feel free to give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.