LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

NOTE: IRS has issued rules explaining education interest deductions. Click here.

Student Loan Interest Deductions

This is to let you know about a new type of deductible interest: interest on qualified education loans. The deduction applies to interest due and paid after 1997. You may qualify for this deduction even for interest you now pay on loans taken out in earlier years.

The deduction is a departure from the general rule that interest on "personal" loans isn't deductible (except, in most cases, for mortgage interest on your home). The maximum amount of interest you can deduct is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 or later. However, the deductible amount is phased out at higher income levels.

The interest must be on a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify. Thus, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.

Only interest paid during the first 60 months that payments are required can qualify. Months in which payments aren't required, e.g., during a deferral or forbearance period, aren't counted against the 60-month period. In the case of an already existing loan, interest payments qualify for deduction to the extent the 60-month period hasn't expired. But months during which interest was paid before 1998 count against the 60-month period. For this purpose, a loan and all refinancings of the loan are treated as a single loan.

The deduction is only fully allowed for taxpayers (married filing jointly) with AGI of $60,000 or less. For taxpayers with AGI of $75,000 or more, no deduction is allowed. If AGI is between $60,000 and $75,000 the deduction is partially reduced, depending on how far above $60,000 the taxpayer's AGI is. For example, if AGI is $65,000, the deduction is reduced by 33 1/3% since the $5,000 excess above $15,000 represents 33 1/3% of the $15,000 excess that would result in complete disallowance. For other taxpayers, e.g., single taxpayers, a full deduction is allowed if AGI is $40,000 or less, no deduction is allowed if AGI is $55,000 or more, and a similar partial disallowance approach is taken where AGI is between $40,000 and $55,000. (For these purposes, AGI is computed with some modifications.) Married taxpayers must file jointly or no deduction is allowed. Also, no deduction is allowed to a taxpayer who can be claimed as a dependent. Where a deduction is allowed, it's taken "above the line," i.e., it's subtracted from gross income to determine AGI. This, it's even available to taxpayers who don't itemize deductions.

Other requirements. The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or dependent. The expenses must be for education furnished while the recipient was an "eligible student," i.e., at least a half-time student. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Please contact us if you would like assistance in determining whether you qualify for this deduction or if you have any questions regarding it.

(04/16/98)

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Last modified: August 19, 1999