Student Loan Interest Tax Benefits: Fact vs. Fiction

With tax season in full swing, I thought I would address some frequently asked questions about student loan interest tax benefits.  Here are a few facts and misconceptions about the details of the student loan interest tax deduction:

FACT:  You may be able to deduct up to $2,500 for interest paid on a qualified student loan.

The modified adjusted gross income (MAGI) limit is less than $75,000 or $155,000 for a married filing joint return.  MAGI is your adjusted gross income on your tax return before subtracting any deduction for student loan interest.  The deduction can be taken even if you do not itemize your deductions.

FICTION:  You can deduct interest accrued but not paid while in deferment or forbearance.

You can only deduct interest that was paid.  If interest accrued on your student loans but you did not pay it then you cannot include the interest as a deduction.  Examples might include deferment, forbearance, or one of the income driven payments plans (income contingent repayment plan, income based repayment plan, and pay as you earn) that result in a monthly payment less than the interest accruing.

FACT:  You can deduct voluntary or extra interest payments.

If you are on a repayment plan that results in a lower monthly payment than interest accruing each month or your loans are in deferment, forbearance, or the loan has not yet entered repayment status, you can deduct extra or voluntary payments up to the extent they are allocated as interest for tax purposes.  For example, if you are on the income based repayment plan (IBR) with a $10 per month payment but the interest is $150 per month and you pay an extra $100 then you may be able to include this extra payment if you qualify for the tax deduction.

FICTION:  You can deduct interest on a loan from a related person.

If you receive a loan from any of the following then you cannot deduct the interest:  spouse, brothers, sisters, parents, grandparents, children, grandchildren or trusts.  You may get a lower interest rate from family but that interest will not be tax deductible.

FACT:  Room and board are considered qualified education expenses.

The cost of room and board qualifies to the extent that it is not greater than the amount determined allowable by the school attended.  For example, if you took out a loan for living expenses and the school allows $2,000 per semester but your cost of living off campus is $3,000 then only $2,000 of the loan would qualify.

FICTION:  You can claim the deduction for payments you made on your loans if your parents still claim you as a dependent on their tax return.

If your parents claim you as an exemption on their tax return but the loan is in your name and only you are legally obligated to make payments then no one will be able to take the tax deduction.

This information is not intended and should not be used as tax advice.  For more details about the IRS rules please see IRS Publication 970 and seek a qualified tax professional to address questions specific to your situation.