The Catholic University of America

Summary of Federal Laws

Tax

Tax Issues Related to Students

Student Loan Interest Deduction

Under I.R.C. § 221, a taxpayer may take a deduction as an adjustment to income for interest paid on student loans. For the tax year 2000, the maximum deduction amount was $2,000 (set to increase to $2,500 for 2001 and later years). Prior to passage of the The Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. Law 107-16), this deduction was only available with respect to interest paid during the first 60 months of the repayment period. However, commencing in tax year 2002, the 60 month limitation period is repealed. Also, under the new law, voluntary interest payments are deductible commencing in 2002. The deduction is phased out for higher incomes.

The interest deduction may be used with respect to "qualified education loans" incurred by the taxpayer for higher education expenses for the taxpayer, his/her spouse, or anyone who was a dependent of the taxpayer at the time the debt was incurred. A loan from a relative or a qualified employer plan does not meet the I.R.S. definition of a "qualified educational loan". The person for whom the expenses were incurred must have been an eligible student, and the expenses for which the loan was used must have been paid or incurred within a reasonable period of time before or after taking out the loan. Also, married couples must file a joint return in order to claim the deduction. A student who is claimed as a dependent on someone else's tax return cannot claim the student loan interest deduction.

Qualified education expenses include

  • Tuition and fees.
  • Room and board.
  • Books, supplies, and equipment.
  • Other necessary expenses (such as transportation)

The institution attended must be an eligible educational institution. 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 Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

In addition, the total amount paid for qualified higher education expenses cannot include the following items:

· Employer-provided educational assistance (see discussion of I.R.C. § 127)

· Tax free withdrawal from education IRAs

· Certain scholarships

· U.S. savings bond interest use to pay higher education expenses

· Veteran's educational assistance benefits

· Any other nontaxable payments (other than gifts, bequests, or inheritances) received for educational expenses

For tax year 2001, the deduction is phased out for single individuals making between $40,000 and $55,000, and for married couples filing jointly making between $60,000 and $75,000. Effective in tax year 2002, the phase out range increases to $50,000-$65,000 for single taxpayers, and to $100,000 to $130,000 for married couples filing jointly. You cannot deduct as interest on a student loan any amount you can deduct under any other provision of the tax law (for example, home mortgage interest).

For a complete discussion of the rules concerning the phase out of the deduction and all other applicable rules relating to the deductibility of student loan interest see I.R.S. Publication 970.

Page added 7/22/01
links updated 6/23/08 rab
links checked July 7th, 2010, FJL.

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