Loans taken for education are no longer as bad as they once used to be. Now with the student loan interest deduction, it is possible for the student to show up to $2,500 as deductible. If the student loan is nullified, then that entire amount can be excluded from the income.
Naturally, this deductible is available only if the loan was used for the purpose of education and no other. The loan could be for anyone in your close family, but that person should be dependent on you for his/her further studies.
The loan can be used to finance the tuition fees, supplies, study materials, room and board and the transportation connected with the education. Also the student for whom the loan is being taken must be pursuing at least a halftime course in a degree, certificate or other such qualified program. The person taking the loan must be legally responsible to fund the student’s education.
Tax deductions on student loans cannot be claimed under some situations. Suppose you are the dependent in someone else’s tax file. In that case you cannot file for deduction. This is also applicable if you are married and are filing a separate return from your spouse (in that case the spouse might get the deduction for his/her education, but not you). If you are not legally obliged to pay for the loan, then you cannot claim any deduction also. Lastly, if the loan was privately funded by a relative, then there are no deductions.
There are some more criteria that decide whether you get the deductible or not. Your loan should be deductible from a Coverdell education savings account, or from a qualified tuitions program. if the interest is needed to pay for higher education expenses, then it could be shown as deductible also. There are many parts of scholarships and fellowships that are nontaxable. Other things such as veterans’ educational assistance and other nontaxable payments (excluding gifts, bequests and inheritances) that are used for education can also be shown as deductibles.
Since 2002, the first sixty months requirement on interest paid is discontinued. Voluntary interest payments are also made permissible for deductions, unlike previously when only required payments were counted. The form to be used for claiming deduction could be either the Form 1040 or the Form 1040A.
Needless to say, families with learning children in them should take the advantage of this sizable deduction in their tax returns. This could help the parents to cover part of the expenses in raising the children and giving them better education.
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