Student Loan Interest Deduction

One piece of good news with student loans: The interest you pay on them may be deductible. The Student Loan Interest Deduction gives eligible taxpayers a deduction for interest paid on qualified student loans. That’s pretty straightforward, but there are a couple of nuances:

–          A “qualified student loan” is one that’s used exclusively to pay for qualified higher educational expenses. Mixed-use debt is not deductible. For example, if you put tuition on a credit card and pay interest on the card, the interest is deductible as long as you don’t pay for anything else with that card. On the other hand, if you use some of your student loan funds to buy suits for job interviews, the interest is not deductible.

–          You can take the AOTC or LLC for expenses paid with a qualified student loan and still deduct the loan interest.

–          The maximum deduction is $2,500 and it starts to phases out for incomes above $60,000 (single) or $125,000 (joint).

–          The deduction is for the named borrower only. If both students and parents have loans, each can take the deduction for the loan(s) for which they are the named borrower as long as they are eligible.

Student loan interest is an “above the line” deduction, which means various things, the most important of which—for student borrowers—is that you can take the deduction even if you don’t itemize on your return. That’s another good reason to start your borrowing with federal Stafford Loans.

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