Can I Deduct My Student Loan Interest?

Q: I’ve heard that even if my parents pay my student loans, which they’ve been doing, I can deduct the interest. Is that true? — Looking for deductions

A: There are lots of rules surrounding who may deduct interest on student loans.

Generally, any personal interest you pay, other than certain mortgage interest, is not deductible on your tax return, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown, N.J.

But, Kiely said, if your modified adjusted gross income (MAGI) is less than $80,000, or $160,000 if filing a joint return, there is a special deduction allowed for paying interest on a student loan, which might also be called an education loan, if that money was used for higher education.

Let’s go a little deeper.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest, Kiely said.

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“This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2015 and 2016,” he said. “The student loan interest deduction is claimed as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A.”

Student loan interest is interest you paid during the year on a qualified student loan. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school, Kiely said. They include amounts paid for tuition and fees, room and board, books, supplies, equipment and other necessary expenses, such as transportation.

Kiely said you cannot deduct interest on a loan you get from a related person rather than from a traditional lender. Related persons include your spouse, your siblings, your ancestors (parents, grandparents), your lineal descendants (children, grandchildren) and certain corporations, partnerships, trusts and exempt organizations.

In figuring what you might be able to deduct, you must also reduce your qualified education expenses by the total amount paid for with the following tax-free items: Employer-provided educational assistance, tax-free distribution of earnings from a Coverdell education savings account (ESA), tax-free distribution of earnings from a qualified tuition program, U.S. savings bond interest that you exclude from income because it is used to pay qualified education expenses, the tax-free part of scholarships and fellowship grants, veterans’ educational assistance, scholarships, fellowship grants, grants and tuition reductions — and any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Kiely said generally, you can claim the deduction if all of the following requirements are met: your filing status is any filing status except married filing separately, no one else is claiming an exemption for you on his or her tax return, you are legally obligated to pay interest on a qualified student loan and you paid interest on a qualified student loan.

So what does this all come down to?

If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest yourself, Kiely said.

“So the answer to your question is yes, you can take the deduction, even if your parents make the payment,” Kiely said.