Student Loan Interest Deduction

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You may be able to deduct up to $2,500 for interest you pay in 2004 on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income.

The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040 (PDF).

You cannot claim the deduction if:
  1. Another taxpayer claims an exemption for you as a dependent,
  2. Your filing status is married filing separately, or
  3. You are not legally obligated to make payments on the loan.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses. The expenses must have been:
  1. For you, your spouse, or a person who was your dependent when you took out the loan,
  2. Paid or incurred within a reasonable time before or after you took out the loan, and
  3. For education furnished during an academic period when the recipient was an eligible student.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. The costs of attendance are determined by the eligible educational institution and include tuition and fees, an allowance for room and board, and an allowance for books, supplies, transportation and miscellaneous expenses.

Costs you incur have to be reduced by:
  1. Non-taxable employer - provided educational assistance.
  2. Non-taxable distributions from a Coverdell education savings account,
  3. Non-taxable distributions from a qualified tuition program (QTP),
  4. U.S. Savings Bond interest that is non-taxable because it is used to pay qualified higher education expenses,
  5. The non-taxable part of scholarships and fellowships,
  6. Veterans educational assistance, and
  7. Any other non-taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

The student must have been enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution and must have carried at least one half of a normal full-time work-load for the course of study being pursued.

The deduction will start to phase out when modified AGI exceeds $50,000 ($100,000 if married filing jointly). You cannot take a student loan interest deduction if your modified AGI is $65,000 ($130,000 if you file a joint return) or more.

If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E (PDF), Student Loan Interest Statement, from the financial institution, from a governmental unit (or any of its subsidiary agencies), from educational institutions, or any other person to whom you had paid student loan interest of $600 or more in the course of their trade or business.

More information on student loan interest deduction and other education benefits is available in Publication 970, Tax Benefits for Education.


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