By Andrew Lampropoulos, Associate, CST Group

The current national student loan debt is estimated around $1,400,000,000 ($1.4 trillion), with federal loan interest rates ranging anywhere from 3% to 7.5% and private loan rates even higher. To help mitigate the effects of student loans, the federal government allows taxpayers to deduct up to $2,500 of interest paid on qualified education loans.

Who can claim the deduction?

  • Taxpayers who paid interest on qualified student loans in the current tax year.
  • Taxpayers who are legally obligated to pay interest on a qualified student loan.
  • Taxpayers who have a filing status other than married filing separately.
  • Taxpayers whose modified Adjusted Gross Income (AGI) is less than the annual phase-out.
  • The taxpayer or taxpayer’s spouse, if filling jointly, cannot be claimed as a dependent on another’s tax return.

What is a qualified student loan?

Qualified student loans are loans taken out with the sole purpose of paying for qualified higher educational expenses. Qualified higher educational expenses include: tuition, books, room and board, and other necessary expenses used by an eligible student to attend an eligible educational institution. Eligible students are any students who are enrolled at least half the time in any program leading to a degree or other recognized educational credential.

Who may take the deduction?

Only taxpayers who are legally obliged to pay interest on the loans may deduct them on their return. This means that parents cannot deduct payments they make on student loans in their child’s name. However, if parents take out a Parent PLUS loan to help pay for their child’s college tuition, these interest payments can be deducted. Another thing to keep in mind is that if the student is being listed as a dependent on the parents’ tax return, then the student cannot deduct the student loan interest on their own tax return.

How much can taxpayers actually deduct?

Taxpayers can deduct the student loan interest actually paid up to $2,500, depending on their modified AGI. Student loan interest is phased out when a taxpayer’s modified AGI (modified AGI being their AGI before subtracting the student loan interest) is between $65,000 and $80,000 ($130,000 and $160,000 for married filing jointly). Taxpayers can deduct the full $2,500 if their modified AGI is under the $65,000 limit and can deduct $0 once the modified AGI crosses the $80,000 threshold. To help taxpayers determine their deductible amount, financial institutions that receive interest payments of $600 or more must send them the Form 1098-E.

---

The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.