Federal Income Tax Rules Regarding Student Loan Payments

The tax rules regarding student loan payments allow you to deduct a portion of the interest you pay on remaining student debt. You will have to qualify based on: your income, the type of debt you have incurred, the interest payments you make and other obligations under the tax code. If you are unsure whether you can make a deduction, you may check the rules on the IRS website or speak with your accountant.

Income Restriction

You will only be eligible if your modified adjustable gross income (MAGI) is under $70,000. Married persons filing jointly cannot exceed $145,000. This is subject to change in any given year. Your MAGI can be found on your tax documents, such as your W2, W4 or 1099. These documents will clearly list how much income you made in a given year based on how much income is taxable. If you made over the given amount, then you will not be eligible for this deduction. Professionals in the public service arena with low-income jobs, such as military service-people or social workers, should see if they qualify for loan forgiveness. This option is available to people with student debt who have chosen to go into the public service field.

Eligible Debt

You cannot deduct interest from simply any debt from your taxes. In fact, you must have incurred the debt solely for education expenses and while you were attending school at least part time. The debt must not be from a relative. If your employer loaned you money to go back to school, the interest on this debt is also not tax deductible in most cases. You will only be able to deduct interest, then, on loans made from qualified lenders with legally binding interest obligations.

Eligible Interest Payments

You may only deduct interest you are legally responsible for paying on the debt. This includes the origination fee, interest rate, rates on any revolving debt and rates on any refinanced or consolidated debt. The last provisions here are important. If you refinanced or consolidated your student debt, then only the interest you are paying on the principal of student debt you refinanced is eligible for deduction. If you had a revolving credit line used to pay for education expenses, the interest rate on this debt is also deductible. Qualified education expenses, though, are defined by the IRS fairly narrowly. They must have been incurred while you were at school at least part-time, and they must have been directly related to the cost of attending your college or university.

Other Rules and Regulations

The interest you are deducting may not be eligible for any other deductions, e.g. mortgage interest deductions. You can only claim the deduction for yourself, your spouse or a qualified dependent in any given tax year. You cannot exceed the maximum deduction. The maximum deduction is subject to change, but in 2008 it was $2,500 for interest payments or $4,000 for tuition payments in a given year. Some federal loans will see different tax rules because they may already be subsidized by the federal government.


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