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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)


Get Educated on the Student Loan Interest deduction


Many students and their parents find it necessary to take out student loans to help pay for the escalating costs of a college education. If you're among them, you may be eligible for a full or partial deduction of up to $2,500 in interest paid on these loans, reports the New Jersey Society of Certified Public Accountants (NJSCPA). The amount you may deduct depends on a number of factors, including your modified adjusted gross income (MAGI).

No Need to Itemize
The student loan interest deduction is claimed as an adjustment to gross income, which means you don't have to itemize to take the deduction. The deduction helps to reduce your taxable income which, in turn, lowers your tax bill. Married taxpayers must file jointly to take the student loan interest deduction. If you can be claimed as a dependent on someone else's tax return, you're ineligible for this tax break.

Deduct Tuition, Fees and More
To qualify for the deduction, the loan proceeds must be used to pay for your own qualifying higher education expenses or the expenses of a spouse or dependent. Qualified expenses include tuition and fees, room and board, books, supplies, equipment and other necessary expenses, such as transportation. The total must be reduced by any Veteran's Administration or employer-provided educational benefits received by the student and also by any nontaxable distributions from a Coverdell Education Savings Account.

Most Loans Qualify
Eligible loans include Federal Stafford and Federal PLUS loans, as well as personal loans issued by banks and other financial institutions. Be aware, however, that you cannot deduct the interest you pay on home equity loan interest as both mortgage interest and student loan interest. The loans must be used to pay for education at a qualified institution. These include any college, university, vocational school, or other post-secondary educational institution eligible to participate in student aid programs administered by the United States Department of Education.

Income May Limit Deduction
The IRS limits the student loan interest deduction for taxpayers whose MAGI exceeds certain amounts. For 2004 returns, the amount is gradually reduced if you are a single, head of household, or qualifying widow or widower filer with MAGI between $50,000 and $65,000. The income phase-out range for married couples filing jointly is $100,000 to $130,000. Once your MAGI goes over the range for your filing status, you cannot take any deduction for your student loan interest.

How to Claim the Deduction
You claim the student loan deduction when you file your income tax return. You may use Form 1040 or Form 1040A, each of which has special lines for claiming the deduction. Lenders and loan services are generally required to report to both you and the IRS if you paid at least $600 in student loan interest during the tax year. By the end of January, you should have received Form 1098-E, showing how much interest you paid. If you have not, contact your lender.

When the Student Is No Longer Your Dependent
Many people incorrectly think that once the child is no longer a dependent, student loan interest is no longer deductible. Not true, says the NJSCPA. Suppose you took out a loan to pay for your son's qualified education. He was your dependent at the time you took out the loan, but has since graduated, is employed, and is no longer your dependent. You can still deduct the interest that you pay (assuming that you otherwise qualify to do so) since your son was your dependent when you took out the loan.


If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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