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previous page Previous Page: Publication 970 - Tax Benefits for Education - Illustrated Example
next page Next Page: Publication 970 - Tax Benefits for Education - Can You Claim the Deduction
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p970-019.htm#en_us_publink100020873

Chapter 4
Student Loan Interest Deduction(p28)

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What's New(p28)


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taxmap/pubs/p970-019.htm#en_us_publink100020875

Income limits increased.(p28)

If you are married and file a joint return, the amount of your student loan interest deduction for 2008 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $115,000 and $145,000. You cannot take a deduction if your MAGI is $145,000 or more. This is an increase from the 2007 limits of $110,000 and $140,000. See Effect of the Amount of Your Income on the Amount of Your Deduction, later, for more information.

taxmap/pubs/p970-019.htm#TXMP73417f59Introduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
This chapter explains:
Table 4-1 summarizes the features of the student loan interest deduction.
taxmap/pubs/p970-019.htm#en_us_publink100020876

Student Loan Interest Defined(p28)


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Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
taxmap/pubs/p970-019.htm#f25221v0401

Table 4-1. Student Loan Interest Deduction at a Glance

Do not rely on this table alone. Refer to the
text for complete details.


FeatureDescription
Maximum benefitYou can reduce your income subject to tax by up to $2,500.
Loan qualificationsYour student loan:

must have been taken out solely to pay qualified education expenses, and
 cannot be from a related person or made under a qualified employer plan.
Student qualificationsThe student must be:
you, your spouse, or your dependent, and
 enrolled at least half-time in a degree program.
Time limit on deductionYou can deduct interest paid during the remaining period of your student loan.
PhaseoutThe amount of your deduction depends on your income level.
taxmap/pubs/p970-019.htm#en_us_publink100020877

Qualified Student Loan(p28)


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This is a loan you took out solely to pay qualified education expenses (defined later) that were:
Loans from the following sources are not qualified student loans.
taxmap/pubs/p970-019.htm#en_us_publink100020878

Your dependent.(p28)


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Generally, your dependent is someone who is either a: You can find more information about dependents in Publication 501, Exemptions, Standard Deduction, and Filing Information.
taxmap/pubs/p970-019.htm#en_us_publink100020879

Exceptions.(p28)
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For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents.
taxmap/pubs/p970-019.htm#en_us_publink100020880

Reasonable period of time.(p29)


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Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.
Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.
If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances.
taxmap/pubs/p970-019.htm#en_us_publink100020881

Academic period.(p29)


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An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
taxmap/pubs/p970-019.htm#en_us_publink100020882

Eligible student.(p29)


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This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
taxmap/pubs/p970-019.htm#en_us_publink100020883

Enrolled at least half-time.(p29)
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A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.
taxmap/pubs/p970-019.htm#en_us_publink100020884

Related person.(p29)


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You cannot deduct interest on a loan you get from a related person. Related persons include:
taxmap/pubs/p970-019.htm#en_us_publink100020885

Qualified employer plan.(p29)


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You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.
taxmap/pubs/p970-019.htm#en_us_publink100020886

Qualified Education Expenses(p29)


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For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.
The cost of room and board qualifies only to the extent that it is not more than the greater of:
taxmap/pubs/p970-019.htm#en_us_publink100020887

Eligible educational institution.(p29)


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An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.
An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility.
Deposit
The educational institution should be able to tell you if it is an eligible educational institution.
taxmap/pubs/p970-019.htm#en_us_publink100020889

Adjustments to Qualified Education Expenses(p29)


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You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items.
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Include As Interest(p30)


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In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest.
taxmap/pubs/p970-019.htm#en_us_publink100020891

Loan origination fee.(p30)


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In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the term of the loan.
Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable.
taxmap/pubs/p970-019.htm#en_us_publink100020892

Example.(p30)

In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Bill began making payments on his student loan in 2008. Because the loan origination fee was not included in his 2008 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Bill's loan is payable in 120 equal monthly payments. He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Bill made 7 payments in 2008, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E.
taxmap/pubs/p970-019.htm#en_us_publink100020893

Capitalized interest.(p30)


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This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.
taxmap/pubs/p970-019.htm#en_us_publink100020894

Interest on revolving lines of credit.(p30)


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This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses, earlier.
taxmap/pubs/p970-019.htm#en_us_publink100020895

Interest on refinanced student loans.(p30)


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This includes interest on both:
EIC
If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan.
taxmap/pubs/p970-019.htm#en_us_publink100020897

Voluntary interest payments.(p30)


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These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status.
taxmap/pubs/p970-019.htm#en_us_publink100020898

Example.(p30)

The payments on Roger's student loan were scheduled to begin in June 2007, 6 months after he graduated from college. He began making payments as required. In September 2008, Roger enrolled in graduate school on a full-time basis. He applied for and was granted deferment of his loan payments while in graduate school. Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2008. Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November.
taxmap/pubs/p970-019.htm#en_us_publink100020899

Allocating Payments Between Interest and Principal(p30)


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Allocating Payments Between Interest and Principal

The allocation of payments between interest and principal for tax purposes may not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal.
taxmap/pubs/p970-019.htm#en_us_publink100020900

Example.(p30)

In August 2007, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2007 through October 2008) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a payment of $200.51 due on the first of each month, beginning November 2008.
Peg did not receive a Form 1098-E for 2008 from her lender because the amount of interest she paid did not require the lender to issue an information return. However, she did receive an account statement from the lender that showed the following 2008 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest).
Payment Date Payment Stated Interest Principal
November 2008 $200.51 $44.27 $156.24
December 2008 $200.51 $43.62 $156.89
Totals $401.02 $87.89 $313.13
To determine the amount of interest that could be deducted on the loan for 2008, Peg starts with the total amount of stated interest she paid, $87.89. Next, she uses a reasonable method to allocate the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401.02 ($87.89 + $10 + $303.13).
For 2009, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. She also will apply the remaining amount of capitalized interest ($625 − $303.13 = $321.87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes.
taxmap/pubs/p970-019.htm#en_us_publink100020901

Do Not Include As Interest(p31)


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You cannot claim a student loan interest deduction for any of the following items.
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When Must Interest Be Paid(p31)


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When Must Interest Be Paid

You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off.
previous pagePrevious Page: Publication 970 - Tax Benefits for Education - Illustrated Example
next pageNext Page: Publication 970 - Tax Benefits for Education - Can You Claim the Deduction
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication