- The capitalized interest is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan.
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- Interest on revolving lines of credit, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses.
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You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest).
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| The maximum amount of the student loan interest that you are allowed to deduct from your income is generally the smaller of $2,500 or the interest you paid during the tax year. |
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The amount of your student loan interest deduction is further limited by your Modified Adjusted Gross Income (MAGI). For year 2015, the deduction is phased out if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return).
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You cannot claim a student loan interest deduction if your MAGI is $80,000 or more ($160,000 or more if you file a joint return).
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MAGI for the purpose of calculating the student loan interest deduction means adjusted gross income minus any deductions for student loan interest, for tuition and fees, or for domestic production activity; and by adding back any of the following exclusions: the foreign earned income exclusion, the foreign housing exclusion, the foreign housing deduction, and the income exclusions for residents of American Samoa or Puerto Rico.
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The student loan interest deduction is an above-the-line adjustment to income on the tax Form 1040 or 1040A, which means you can take the student loan interest deduction even if you don’t itemize, or in addition to your itemized deductions, but you can’t take it if you file Form 1040EZ. You can figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR.
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| If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E, Student Loan Interest Statement, from the entity to which you paid the student loan interest. |
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| It is also worth mentioning that, under current rules, if a student loan borrower still has loan debt after 25 years of payments under an income-driven repayment option, the remaining principal and interest is discharged. As a general rule, income from the cancellation of indebtedness is taxable as income; however, Section 108(f) of the Internal Revenue Code allows the forgiveness of certain student loans to be excluded from taxable income if the student loan was made by: |
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- The federal government, or a state or local government or subdivision;
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- A tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or
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- A school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.
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If you receive financial assistance with your student loan payments as a benefit from your employer, such assistance will be considered taxable income to you.
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| To make certain that you take advantage of all the tax deductions you are entitled to, please consider the qualified advice of a tax professional. |
