Student Loan Interest Deduction

You may be able to deduct interest you pay on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income.

The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040.

You cannot claim the deduction if:

• Another taxpayer claims an exemption for you as a dependent,
• Your filing status is married filing separately, or
• You are not legally obligated to make payments on the loan.

A qualified student loan is a loan you took out solely to pay qualified higher education expenses. The expenses must have been:

• For you, your spouse, or a person who was your dependent when you took out the loan,
• Paid or incurred within a reasonable time before or after you took out the loan, and
• For education furnished during an academic period when the recipient was an eligible student.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. The costs of attendance are determined by the eligible educational institution and include tuition and fees, an allowance for room and board, and an allowance for books, supplies, transportation and miscellaneous expenses.

Costs you incur have to be reduced by:

• Non–taxable employer – provided educational assistance.
• Non–taxable distributions from a Coverdell education savings account,
• Non-taxable distributions from a qualified tuition program (QTP),
• U.S. Savings Bond interest that is non–taxable because it is used to pay qualified higher education expenses,
• The non-taxable part of scholarships and fellowships,
• Veterans educational assistance, and
• Any other non–taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

The student must have been enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution and must have carried at least one half of a normal full–time work–load for the course of study being pursued.

The deduction will start to phase out when modified AGI exceeds certain amounts, please refer to Publication 970 for these limits.

If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E (PDF), Student Loan Interest Statement, from the financial institution, from a governmental unit (or any of its subsidiary agencies), from educational institutions, or any other person to whom you had paid student loan interest of $600 or more in the course of their trade or business. You are a kindergarten through grade 12;

• Teacher
• Instructor
• Counselor
• Principal, or
• Aide

You work at least 900 hours a school year in a school that provides elementary or secondary education, as determined under state law.

Qualified expenses are unreimbursed expenses [otherwise deductible trade or business expenses] you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. For courses in health and physical education, expenses for supplies are qualified expenses only if they are related to athletics.

To be deductible, the qualified expenses must be more than the following amounts for the tax year:

• The interest on qualified U.S. savings bonds that you excluded from income because you paid qualified higher education expenses,
• Any distribution from a qualified tuition program that you excluded from income, or
• Any tax-free withdrawals from your Coverdell Education Savings Account.

More information on student loan interest deduction and other education benefits is available in Publication 970, Tax Benefits for Education.

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