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1.10 Student Loan and Tax Deductions

Since 1998, taxpayers with qualified loans to pay certain costs of attending higher education have been allowed to take tax deductions from gross income for the interest they pay on these loans.307 Qualified loans are loans taken out solely to pay qualified education expenses for an individual, his or her spouse, or a dependent. The loans must also be for education provided during an academic period for an eligible student. Loans from related persons and qualified employer plans do not qualify.

The maximum deductible interest on a qualified student loan is $2500 per return. The amount of the student loan interest deduction is phased out (that is, gradually reduced) if the modified adjusted gross income is between $65,000 and $80,000 ($135,000 and $165,000 if borrowers file a joint return). Borrowers cannot take a student loan interest deduction if their modified adjusted gross income is $80,000 or more ($165,000 or more if you file a joint return). Parents may also deduct interest for loans taken out to pay for their children’s education as long as the children were dependents when the parents received the loan.

There are additional tax benefits for education, including (1) certain tax-free scholarships and fellowships; (2) American Opportunity Tax credits (up to $2500 for the first four years of postsecondary education, up to $1000 of which is refundable) for each eligible student, Lifetime Learning credits of up to $2000 for qualified education expenses paid for each eligible student; (3) limited deductions for tuition and related expenses; and (4) deductions for work-related education. The American Opportunity Tax credit was made permanent in December of 2015. More information about these tax benefits, including current income-based eligibility restrictions, is available online in Publication 970 on the Internal Revenue Service website.308

Footnotes

  • 307 {307} 26 U.S.C. § 221. For more information, including current maximum deductions and income restrictions, see Internal Revenue Serv., Publication 970, Tax Benefits for Education; Internal Revenue Serv., Tax Topic 456, Student Loan Interest Deduction. The IRS regularly updates Publication 970, which is available at www.irs.gov.

  • 308 {308} See Internal Revenue Serv., Publication 970, Tax Benefits for Education; Internal Revenue Serv., Tax Topic 456, Student Loan Interest Deduction.