When considering options for financing all or part of your college education, scholarships and grants are good choices. However, these are only available in limited quantities and not every student qualifies. If you need to pay for college but simply don't have the money, student loans can be the answer. One major advantage of student loans is the tax benefits available to loan borrowers, even if the loan was taken out by a parent for a child.
Interest Deduction
Your taxable income may be reduced by up to $2,500 if you have paid that much in student loan interest. There are certain criteria that must be met for student loan interest to be deductable.
- The loan on which the interest was paid must have been for the taxpayer, the taxpayer's spouse, or a student who was a dependant of the taxpayer at the time the loan was obtained.
- The interest paid must have been on a loan that was taken out to pay for direct college costs such as tuition, room and board, books, and other necessary fees.
- If the interest was paid on a revolving line of credit, it may qualify as a deduction if the credit was used only for expenses related to higher education.
Only interest paid under these circumstances is eligible for a tax deduction.
Interest cannot be deducted from a loan taken out be another relative or under a qualified employer plan.
Your lender must send out Form 1098-E if you paid more than $600 in interest on a qualified loan. Usually, this form must be sent out by the end of January. If you meet the requirements for a tax deduction but do not recieve this form, contact your lender immediately.
As long as you have the loan and are legally required to pay interest on it, you may continue to claim the tax deduction. Once the loan is paid off or you are no longer required to pay interest, you cannot claim student loan interest deductions.
Income Requirements
There are certain income requirements that must be met to qualify for a student loan tax deduction. Most tax deductions are available to higher income earners, but the student loan deduction is actually available to those in a lower income bracket. Single filers must have an adjusted gross income of less than $50,000 and married joint filers must have an adjusted gross income of less than $105,000.
There is a reduced reduction available for single filers with an adjusted gross income of between $50,000 and $65,000 and for married joint-filers with between $105,000 and $135,000 ajusted gross income.
If you are a single or married joint filer with incomes above these levels, then you are not eligible for the deduction.
To claim a deduction based upon income, you must file either Form 1040 or 1040A.
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