Taxpayers can deduct up to $2,500 per year of interest paid on qualified education loans, which means loans taken out solely to pay for education expenses including tuition, fees, room and board, books, equipment and transportation.
Here are two important restrictions that you need to know:
1) Student loan interest is only deductible by the taxpayer with the legal obligation to repay the loan. This means that Stafford Loan interest can’t ever be deducted by the parents, even if they make interest payments on their child’s behalf while he/she is in school. (Note that Mom and Dad can deduct PLUS Loan interest, since they have primary obligation to repay such a loan.)
2) This deduction is not available to a taxpayer who is claimed as a dependent on another taxpayer’s return. This means that even if a student has income and files their own tax return, as long as Mom & Dad are claiming their dependency exemption (probably as long as they are in school) the student can’t claim the Student Loan Interest deduction, even if they paid interest in that year.
Because of these two restrictions, the best option for getting the maximum tax benefit is for the student to begin paying their Stafford Loan after graduation, at which time they will (hopefully!) no longer be a dependent of their parents. If parents make payments on their child’s loan after graduation and treat the payments as gifts to the child, the child can deduct the interest on his/her tax return, even though Mom and Dad actually paid it.
The Student Loan Interest deduction is an “above the line” deduction, meaning even taxpayers who don’t itemize deductions can still claim this deduction, in addition to the standard deduction. Eligible educational institutions include colleges and vocational schools, and other post-secondary institutions that are eligible to participate in US Dept. of Education student aid programs. Students must be enrolled at least half time in a degree or certificate program. This benefit is phased out when AGI is between $120,000 and $150,000 for MFJ. ($60,000 – $75,000 for Single and HOH) This benefit is not available to married taxpayers filing separately.
We are in the business of helping families through the major life transition of sending their children to college. For many, it will be the most expensive time of their lives and, if not handled properly, could cost them their retirement. If you or someone you know needs the help and guidance of a trained financial professional, don’t hesitate to contact your local College Planning Relief® Licensee. Remember, you shouldn’t have to choose between your child’s college and your retirement.
