I have a love/hate relationships with student loans. I love that they allowed me to go to college and law school – I couldn’t have done it otherwise. But I hate almost everything else about them. And as a tax attorney with two graduate degrees, I find it impossible to read my own loan statements – there’s something horribly wrong with that picture.
Every year, I get a stack of forms 1098-E which detail the amount of interest that I pay to the various agencies which own me administer my loans. I take some solace in the fact that, in theory, I can deduct some of the student interest. If you pay interest on a qualified student loan, you might be able to deduct it, too. And the best part? The student loan interest deduction is treated as an adjustment to income on your form 1040 so you don’t even need to itemize to claim it.
So what are the criteria?
- You pay qualified student loan interest (meaning a loan used solely to pay qualified higher-education expenses) during the year;
- Your filing status is not married filing separately;
- Your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly); AND
- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return.
Phaseouts and restrictions apply. So be sure and read the fine print.
And, if your student loan is canceled, in addition to some serious grief, you may have included the amount of the loan in income, unless an exemption applies (such as, for example, a service-based cancellation).
Like you said, the loan must have solely used for qualified higher education expenses. How many people do you think deduct the interest even though they used the money for something else? According to the Code, if you take out $100,000 in student loans and use $1 of those loans to pay a tip at a bar, ALL of the loan interest is disqualified.
Just an interesting tidbit that gets overlooked quite often. Could you imagine being audited and having to prove each dollar of your student loans was used for qualified higher education expenses?
Another interesting thing is that the interest is deductible by the person named on Form 1098-T. If the parents paid the interest and get Form 1098-T they’re likely to have too much income for the deduction. My daughter tells friends that she has a long-term relationship with Sallie Mae. We handled the bachelor’s degree but Sallie helped her get two masters.
Here’s a question – my parents pay the loan interest on loans taken out while two of my siblings were their dependents. My parents are cosigners on the loans. In 2008, my parents deducted the loan interest (because they paid it) on their return. My siblings were no longer claimed as dependents by my parents in 2008. The IRS disqualified this loan interest deduction. From my reading of the Code, I believe this is deductible. We drafted a letter and again were denied. Am I missing something?
My guess – and I haven’t seen your actual correspondence – is that the problem has to do with the notion that the loan was not in the name of your parents. A co-signer is not the owner of the loan and many loan service companies, such as AES, will not issue a 1098 in the name of a co-signer. Technically, however, I believe the IRS should still allow your parents to claim the interest if the loan was incurred while your siblings were still dependents. If your parents did not claim the students when the loans were taken out and paid the interest, they would not be able to deduct the interest.
That said, there are other exceptions, too, which might apply, such as whether the interest was used for qualified education expenses, etc. If you’re still stumped, consider having a tax pro take a peek.
Kelly,
No one in my Bursar’s office EVER told me that the interest on student loans was only tax deductible depending on what I made. I was pretty pissed when I did my 2007 taxes and I was a first year associate, and couldn’t fully deduct my interest and I didn’t even get one of those crazy six figure jobs!
http://www.myjourneytomillions.com/articles/education-loan-interest-not-always-tax-deductible/
Question to Meagan, have your parents been able to deduct the interest after all? I’m asking because I’m in the similar situation except my children were indeed claimed as dependents on my 1040.
I am a co-signer of the loans that my spouse (now ex) have never paid a single cent on. We got divorced on the 29th of Dec 09 so my filing status is single. I have started paying 13 months ago and the 1098-E form list her name only. How can I get away with claiming the deduction? I have all the evident that she has not pay anything since the beginning and I think IRS should be understandable in types of cases but what is the right thing to do?
I have the same situation as Alan and would love an answer.
I co-signed my ex’s loan and have been paying it for 3 years. I do deduct the interest, but someone recently told me that I shouldn’t be. I can’t find a clear answer on this. I am the co-signer and I paid the interest – why shouldn’t I deduct it?
Aren’t I legally obligated to make these payments? Because if not, maybe I’ll just stop paying the damn thing.