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    Student Loan Interest Deduction

    Submitted by Richard Allen

    ISSUE: Form 1098-E shows the Borrower, the Borrower’s social security number, and the current year’s Student loan interest amount. However, it does not show who has paid the interest.

    Tax practitioners need to ask: WHO PAID THE LOAN PAYMENTS?

    Parental Deduction of Student Loan Interest

    One of the most common misconceptions about the student loan interest deduction is that a parent can claim it for helping make payments on their child’s loan. That is not the case. A parent can take the interest deduction only if they are personally liable for the loan. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by Mom and Dad each year.

    This means that Stafford, Perkins, PLUS Graduate Loans, and all other educational loans students take out for themselves will not be deductible for a parent because the student is the borrower. The student loan interest deduction allows an individual to deduct any interest actually paid, not just accumulated, on a student loan during the tax year, as long as certain conditions are met. The maximum deduction is $2,500 and is subject to income limitations.

    Deductibility Qualifications

    All of the following must be true of the loan and the payer’s tax filing status for the interest to be considered deductible:

    • Your filing status is not married filing separately.

    • No one else can claim you—or your spouse, if you’re married—as a dependent on their tax return.

    • You are legally obligated to pay the interest on the student loan. • You actually paid the interest. Accumulation of interest on your balance by itself is not deductible.

    Further, the money received from the loan must have been used only for qualified higher education expenses, such as tuition, fees, room and board, books, supplies, and equipment. Can I deduct student loan interest as a cosigner? Yes, a parent who cosigned student loans may claim the student loan interest deduction.

    To claim the student loan interest deduction, the borrower must be legally obligated to make the payments on the student loans and the Student must be a dependent of the Cosigner.

    What if a student pays back the Parent Plus Loan?

    No, in order for you to claim the interest, the payer must be legally liable for the loan, which you are not – in the case of a Parent Plus loan. You can’t simply take over the Parent Plus loan, but you could refinance the amount due with a private student loan. There are many factors to consider before choosing this route, so research this carefully.

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