What Are the Rules for Tax-Deducting Student Loan Interest?

Unless you're lucky enough to have parents who could afford to pay for your college education, chances are good that you used student loans to finance a considerable proportion of your tuition bills and other school-related expenses. After all, the cost of a college or university education is far higher today than it was just 10 years ago. As the cost of tuition, fees and other expenses rises at nearly triple the rate of inflation, it's looking increasingly likely that meaningful education reform will be required to "bend" the so-called cost curve. Unfortunately, such reform appears to be a tall order at the moment.

Fortunately, the IRS has some policies that may help recently-graduated students who have begun to repay their loans. If you're among these folks, you must look over IRS Publication 456 to determine how your now-due student loans might actually reduce your ongoing tax liabilities. Depending upon the total value of your outstanding student loans, you may be able to reduce your annual tax burden by several thousand dollars. This reduction might remain applicable until you've completely paid off your student loans.

Although the IRS's guidelines for the so-called Student Loan Interest Tax Deduction change fairly frequently, they have been set for the past several years. First, it's important to note that the Student Loan Interest Tax Deduction is a tax deduction. It's not a credit or exemption. As such, it can't directly reduce your tax payments.

In other words, this tool can reduce the total amount of your taxable income up to a pre-defined limit. As of 2012, you can reduce your income by up to $2,500 using this deduction. To determine the exact deduction amount that you're eligible to claim, you'll need to figure out the exact value of the student loan interest that you paid during the appropriate tax year. Once you've figured this out, you can multiply the value of your deduction by the rate at which you pay taxes. If you're in the 35 percent bracket, a deduction worth $2,500 could reduce your tax burden by about $875.

The Student Loan Interest Tax Deduction comes with some easy-to-understand restrictions. For starters, it can't be used by any married taxpayer who files taxes separately from his or her spouse. There are also frequently-changing income thresholds that taxpayers who wish to claim the deduction can't exceed. In recent years, these thresholds have been set at around $75,000 for single filers and $125,000 for married filers.

More On This Topic


Comments are closed.