Many colleges are now cutting back on grants and scholarships causing American families to opt for a lower-price public in-state school or borrow more money to afford college. With many students or families taking out loans to go to college, it is important to know all the facts about the student loan interest deduction for your federal tax return. The student loan interest is reported on Form 1098-E in box 1. The student loan interest deduction allows you to claim a maximum of $2,500 in student loan interest deduction if you are currently paying student loans, but this varies with income.
Student Loan Interest Defined
Student loan interest is the interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
Who Is An Eligible Student?
An eligible student is one who is enrolled in at least half-time in a program leading to a degree, certificate or other recognized educational credential. Note: Half-time= the student was taking at least half of the normal full-time work load
Can You Claim The Deduction?
You can generally claim the deduction if all of the following requirements are met:
Your filing status is any filing status except married filing separately.
No one else is claiming an exemption for you on his or her tax return.
You are legally obligated to pay interest on a qualified student loan.
You paid interest on a qualified student loan.
What Are Qualifying Education Expenses For The Student Loan Interest Deduction?
For the purposes of the student loan interest deduction, qualified education expenses are the total costs of attending an eligible education institution. The expenses include amounts paid for tuition and fees, room and board, books, supplies, equipment and other necessary expenses.
Type Of Loan Interest You Can Deduct
In addition to simple interest on the loan, if all other requirements are met, the loan origination fee, capitalized interest, interest on revolving lines of credit, interest on refinanced student loans and voluntary interest payments can be considered student loan interest.
Loan Origination Fee Commonly, there is a one-time fee charged by your lender when the loan is made. In order for the loan origination fee to be deducted as interest, the fee must be used for the use of money rather than for property or services.
Capitalized Interest Capitalized interest is the unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest may only be used as a deduction when payments of principal are made on the loan. Note: In a year where no payments were made on the loan, no deduction for capitalized interest may be made.
Interest on revolving lines of credit Interest on credit card debit may be used as a student loan interest deduction only if the credit card or line of credit was used to pay qualified education expenses.
Interest on refinanced Student Loans Interest on refinanced student loans includes consolidated loans and collapsed loan.
Voluntary Interest Payments Voluntary interest payments are payments made on a qualified student loan during a period when interest payments were not required.
IRS Publication 970- Tax Benefits for Education can provide further information and how to properly claim the student loan interest deduction.