The 1997 tax act created a limited deduction for interest paid on qualifying educational loans. The deduction is claimed on the face of Form 1040 or 1040A, and does NOT require that you itemize deductions.

A qualifying educational loan is a loan you borrowed solely to pay qualified higher education expenses for yourself, your spouse or your dependent. The student must be enrolled at least half-time in a program that will lead to a degree, certificate or other recognized educational credential. The debt must be a loan obtained solely to pay the educational expenses; it cannot be a mixed-use loan, nor can it be credit card debt (unless this was the ONLY thing the card was used for). The loan can be from a private individual, but not anyone related to the borrower.

For the purpose of the limited deduction, qualified higher educational expenses are defined a lot more liberally than in similar terms for other tax deductions or credits. The expenses include tuition, fees, room, board, purchase of equipment needed for school (such as a computer), and transportation to and from school. But the total amount of allowable expenses must be reduced by any tax free scholarships, employer educational assistance, qualifying excludable US savings bond redemption proceeds, veterans or armed forces educational allowances, or any other assistance that is excludable from the student's income.

Student Loan Interest Deduction – Interest on student loans for higher education may now be deducted whenever paid and regardless of the age of the loan. Prior to 2002, only payments made during the first 60 months of the required repayment term counted. Voluntary payments – for example, those made before the student graduated – did not qualify for the deduction.

The deduction claimed cannot exceed the LOWER of the actual interest paid during the year, or

For 1998 $1,000
1999 1,500
2000 2,000
For 2001 & after 2,500

This deduction is now available to most taxpayers with incomes up to $65,000, with the deduction amount phasing out as income increases above $50,000. For married couples filing jointly, the phaseout range is from $100,000 to $130,000.

(c) Copyright 1995-2015 by TaxLogic