Qualified Student Loan
- You can deduct the interest you pay on a qualified student loan during the tax year. Qualified student loans are funds you borrow to pay for the qualified education expenses of an eligible student. However, the deduction is not available if you borrow the funds from a relative or as part of an employer's student loan program.
- The loan funds must be to pay for you, a spouse or a dependent to attend school. The student must be enrolled at least half-time in an educational program leading to a degree, certificate or other recognized credential. The half-time requirement is not a predetermined amount of coursework; rather, the institution a student attends determines what full-time requirements are for each program of study. For example, if a student is working toward a law degree and the law school requires full-time student to take a minimum of 12 credits per semester, attending a minimum of six credits per semester meets the half-time requirement.
Qualified Education Expenses
- Qualified education expenses include the total cost of attendance, such as tuition, fees, room and board, books and supplies, and necessary transportation. However, if you use $2,000 of the loan funds to book a vacation, the interest that accrues on that portion is not deductible.
Eligible Education Institution
- To qualify for the deduction, you must attend an eligible education institution. An eligible institution is a college, university, vocational school or any other postsecondary institution that is eligible to participate in the federal financial aid program. This can include both domestic and foreign institutions. If the educational institution is no longer eligible to participate in the financial aid program, the deduction is limited to the qualified expenses you pay during periods of eligibility.
- Deductible student loan interest includes the loan origination fees you pay to the lender when you obtain the loan. Interest that accrues on capitalized interest can be deducted each year that you make a payment. The interest that accrues on a line of credit from a credit card is deductible student loan interest if you only use the credit card to pay qualified educational expenses. For example, if you open a new credit card and use it to pay $10,000 in tuition and $15 for movie tickets, none of the interest can be deducted.
- The IRS limits the amount of student loan interest you can deduct in a tax year. In 2009, the interest deduction is the smaller of $2,500 or the actual interest you pay. To figure the deduction, use the amounts provided on Form 1098-E. All lenders and government agencies are required to send you this statement each year listing all qualified student loan interest you paid.