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Student loan interest: How parents can pay and give their child the deduction

Kelly Phillips Erb is a tax attorney in the greater Philadelphia, PA area, where she focuses on tax law for businesses and families. She is also a freelance author and writer.

Kelly has published Ask the TaxGirl: Everything Parents Sh...

deduct student loan interest

Paying for college can be expensive. According to American Student Assistance, close to 60 percent of the nearly 20 million Americans who attend college each year borrow to cover the cost. That works out to nearly 12 million students who are financing their education each year.
Student loan debt


There are approximately 37-million student loan borrowers with outstanding student loans, most of who are under the age of 30. They owe nearly $1 trillion combined in student loan debt.

Paying back those dollars can be tough. Fortunately, unlike other personal debt (such as credit card debt), student loan interest may be deductible on your federal income tax return. The student loan interest deduction is an adjustment to income, sometimes referred to as an “above the line” deduction, since you don’t have to itemize in order to claim the deduction.

How much can you deduct?

For the current tax year, you can deduct up to $2,500 in interest you pay on a qualified student loan if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 for married taxpayers filing jointly). For most taxpayers filing a federal form 1040, MAGI is the total of your adjusted gross income (found on line 37) without taking into account the student loan deduction (found on line 33), the tuition and fees deduction (found on line 34) or domestic production activities deduction (found on line 35). For taxpayers filing a federal form 1040A, MAGI is your AGI (found on line 21) without the student loan interest deduction (found on line 18) and tuition and fees deduction (found on line 19).

Typically, if you paid $600 or more in interest for a qualified student loan, you will receive a form 1098-E, Student Loan Interest Statement. Use that form to report information about interest paid during the year; it does not matter if the interest is the minimum which was required or if you paid more in voluntary interest payments. A qualified student loan is a loan taken out solely to pay qualified higher education expenses.

Don’t get hung up on the form 1098-E, however. Interest is interest. You may deduct the interest paid for purposes of paying qualified higher education expenses if paid during the year, whether you receive a form 1098-E or not. This includes interest on credit card debt used only to pay qualified education expenses. It does not include loans from related parties or employers.

What are qualified higher education expenses?

For purposes of the deduction, qualified higher education expenses are the total costs of attending an eligible educational institution, including graduate school. This includes amounts paid for tuition and fees, as well as room and board (some restrictions apply), books, supplies and equipment and other necessary expenses.

How to claim the deduction

Assuming that you meet the income criteria outlined above, you can claim the deduction if you paid interest that you were legally obligated to pay. You and your spouse, if married filing jointly, cannot be claimed as dependents on any other person’s return (even if they do not claim you). You may not claim the deduction if you file as married filing separately.

The deduction can be claimed for interest paid on a loan taken out for you, your spouse or a person who was your dependent when you took out the loan. A dependent is considered to be your qualifying child or your qualifying relative. Some special rules apply to the “normal” rules for dependents. For this purpose, an individual can be your dependent even if you are the dependent of another taxpayer. An individual can be your dependent even if the individual files a joint return with a spouse. More importantly, an individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,800 for 2012).

The gift that gives twice

Here’s the most fantastic part. I know that paying off these loans is tough. And in this economy, not all students can meet their student loan obligations. Sometimes, a parent or other person has to step in and pay on your behalf. In almost every circumstance — including for the home mortgage interest deduction — that means no deduction. Not so for the student loan deduction.

If you are legally obligated to make student loan interest payments and someone else makes a payment on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. No, that’s not a typo. Parents can make those payments for a child and the child can still claim the interest for purposes of the deduction. It’s the gift that gives twice. Take advantage of it.

More about family finances

Creating accounts for kids: Practical and tax consequences
Claiming dependents on your taxes
Tax consequences of gifts to kids

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