Whose Loan Is It Anyway?

Regardless of who is going to be paying back the loan, it’s worth looking at both parent and student loans when you consider borrowing for college. Each has its pros and cons and depending on your situation, one may be better than the other.

In general, interest paid on student loan debt—federal or private loans—is tax-deductible to the named borrower, so long as the borrower’s income falls below certain levels and the borrower is not claimed as a dependent on anyone else’s tax return. In 2014, the deduction phases out between $60,000 and $75,000 for single borrowers and $125,000 and $155,000 for married filing joint. If the parents’ income exceeds the applicable cap, then they cannot claim a tax deduction for the interest. It’s more likely that the student’s income will not exceed the cap, so even if the parent is paying off the loan, it can be beneficial to have the student be the named borrower. Again, the interest is deductible to the named borrower, regardless of who makes the payments.

As discussed previously, Stafford loans (loans to students) have lower interest rates and fees, but also lower limits on the amount that can be borrowed. However, for most families intending to borrow, they can be the best starting point.

PLUS loans have higher limits but are only made to parents or to graduate students, and the interest rates and fees are higher. But the parent can take the tax deduction for interest paid if their income falls within the applicable range.

For better or for worse, there are many borrowing options available to college students and their families. Who takes out the loan is just one of the questions to answer.

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