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Home equity loans, credit cards, etc. Loans that are not part of a student loan program can be qualified student loans under the following circumstances.
• Debt must be incurred solely to pay qualified expenses. Loans used for more than one purpose do not qualify.
• No deduction is allowed for interest that is an allowable deduction under any other provision of the tax law.
• Expenses must be for a specific academic period and paid or incurred within a reasonable time before or after the loan. There is a safe harbor for funds disbursed during the period that begins 90 days before the start and ends 90 days after the academic period.
Interest paid by parents or other third parties. Interest is deductible only if the taxpayer has a legal obligation to make interest payments under the terms of the loan. If a person not obligated to pay interest makes the payment, the taxpayer legally obligated to pay is treated as receiving the payment from that person and, in turn, paying the interest.
If a loan is only in the name of the student, the student can deduct interest paid by his or her parents. Because the parents are not legally obligated to pay back the loan, the parents cannot deduct the interest. If the student is claimed as a dependent, neither the parents nor the student can deduct the interest.
Qualified education expenses. The cost of attendance at an eligible educational institution, including graduate school, reduced by the adjustments listed in the next column.
Cost of attendance is determined by the school using federal financial aid rules. It includes tuition and fees and allowances for room and board, books, supplies, transportation, and miscellaneous expenses. Loans under most student loan programs are capped by the cost of attendance.
Adjustments. Reduce qualified expenses by:
• Tax-free assistance (scholarships, fellowships, grants, employer-provided assistance, veterans benefits, and any other nontaxable payments except gifts or inheritances).
• The tax-free portion of distributions from a Coverdell education savings account (ESA) or qualified tuition plan (QTP).
• U.S. savings bond interest excluded from income because it was used to pay qualified education expenses.
Student Loan Interest Deduction at a Glance
Maximum Deduction
Up to $2,500 of interest including early payments not yet required, interest on refinanced and consolidated loans, and capitalized interest.
Phaseout
At modified AGI of $70,000 – $85,000 ($140,000 – $170,000 MFJ). 1
Loan Qualifications
• Incurred by the taxpayer solely to pay qualified education expenses, and
• Cannot be from a related person or qualified employer plan.
Student Qualifications
The student must be:
• A taxpayer, spouse, or a person who was a dependent 2 when the loan was taken, and
• Enrolled at least half-time in a degree or certificate program. 3
Time Limit on Deduction
Interest is deductible during the remaining period of the student loan.
Ineligible Taxpayers
• A taxpayer filing MFS.
• A taxpayer claimed as a dependent.