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Tax Benefits With Student Loans

Student loans can help you at tax time

Student loans are an excellent option for financing all or part of your education. Scholarships and grants are available in limited quantities and not everyone qualifies. For those of us, who need to pay for college but don't have the cash, student loans are a lifesaver. What's even better is that there are tax benefits available to student loan borrowers, even if you took out the loan for your child.

Student Loan Interest Deduction
If you pay interest on your student loan, this interest may be used to reduce your taxable income by as much as $2,500 (if you paid that much in student loan interest).

Certain conditions must be met for student loan interest paid to be deducted.

  • The interest must have been paid on a loan on a loan for the taxpayer, the taxpayer's spouse, or someone who was the taxpayer's dependent at the time the loan was taken out.

  • The interest must have been paid on a loan that was taken out to pay for tuition and related expenses, like room and board, books, and other necessary fees.

  • Interest paid on revolving lines of credit may qualify if the credit was used exclusively for expenses related to higher education.

Only interest paid under those conditions can be used as a tax deduction If the loan was taken out from a relative or under a qualified employer plan, interest paid cannot be deducted.

Your lender must send Form 1098-E if you made more than $600 in interest payments on a qualified loan. In most years, the form must be sent out by the end of January. Contact your lender if you meet the requirements but did not receive a form.

You can continue claiming the deduction as long as you have the loan and are legally required to pay interest on it. Once you have repaid the loan or are no longer payment required interest payments, you cannot claim student loan interest deduction.

Income Requirements
While most tax deductions are available to higher income earners, the student loan interest deduction is actually available for lower income earners. In 2006, single filers must have an adjusted gross income of less than $50,000 and married-joint filers should have an adjusted gross income of less than $105,000.

A reduced reduction is available for single filers with an adjusted gross income between $50,000 and $65,000 and for married-joint filers between $105,000 and $135,000. Single filers with an adjusted gross income greater than $65,000 and married-joint filers more than $135,000 are not eligible for the deduction.

To claim the deduction, income tax filers must use either Form 1040 or 1040A. For more information, the IRS Publication 970 (2006) has complete, detailed information on the student loan interest tax deduction.