Student Loan Interest Deduction

You may be able to deduct up to $2,500* of student loan interest on a "qualified educational loan."

Qualified Educational Loan Defined - It is a loan you borrow solely to pay "qualified higher education expenses" for yourself, your spouse or your dependent. The student must be enrolled at least half-time in a program that will lead to a degree, certificate or other recognized educational credential. The debt must be a loan obtained solely to pay the educational expenses; it cannot be a mixed-use loan, nor can it be credit card debt, unless this was the ONLY thing the credit card was used for. The loan can be from a private individual, but not anyone related to the borrower.

Qualified Educational Expenses Defined - These expenses include tuition, fees, room, board, books, supplies, equipment, and transportation to and from school. But the total amount of allowable expenses must be reduced by any tax free scholarships or fellowships, employer educational assistance, non-taxable withdrawals from an Coverdell education savings account (ESA), tax-free distributions from a qualified tuition program (QTP), excludable U.S. savings bond interest, veterans or armed forces educational allowances, or any other assistance that is excludable from the student's income.

Qualified Interest - In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be deducted student loan interest:

Loan origination fees - These are the costs (other than fees for services) of getting the loan.

Capitalized interest - This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. 

Interest on revolving lines of credit - This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) ONLY to pay qualified education expenses.

Interest on refinanced student loans - This includes interest on both:

• Consolidated loans — loans used to refinance more than one student loan of the same borrower, AND

• Collapsed loans — two or more loans of the same borrower that are treated by both the lender and the borrower as one loan.

Voluntary interest payments - These are payments made on a qualified student loan during a period when interest payments are NOT required, such as when the borrower has been granted a deferment.

For tax year 2011, the student loan interest deduction amount begins to phase-out when adjusted gross income (AGI) reaches:

• $60,000 if single, head of household or qualifying widow(er)

• $120,000 if married filing JOINTLY

• $0 if married filing SEPARATELY. Student loan interest CANNOT be deducted if using this filing status.

The student loan interest deduction amount is COMPLETELY phased-out when adjusted gross income (AGI) reaches:

• $75,000 if single, head of household or qualifying widow(er)

• $150,000 if married filing JOINTLY

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