What Is a Qualified Education Loan for a Tax Deduction?
Not all student loan interest is tax-deductible. Understand the specific IRS criteria for both the loan and the taxpayer to see if you can lower your taxes.
A loan taken out for educational pursuits can lead to a tax deduction, but only if it meets a specific set of government standards. The Internal Revenue Service (IRS) establishes the rules for what makes a loan a “qualified education loan,” a designation needed for anyone repaying this type of debt. Understanding this classification is the first step in determining if the interest paid on a student loan can reduce a person’s taxable income for the year.
Defining a Qualified Education Loan
For a loan to be considered a qualified education loan by the IRS, its primary characteristic is its purpose. The funds must have been borrowed with the sole intention of paying for qualified education expenses for an eligible student. The loan can come from various sources, including federal student loan programs, private lenders like banks or credit unions, or certain state-sponsored loan programs.
Qualified education expenses are broad but specific. They include:
- Tuition and fees required for enrollment or attendance
- Books, supplies, and any equipment needed for courses
- Room and board, subject to limitations based on the school’s official cost of attendance figures
- Other necessary expenses, such as transportation, if required for the educational program
The loan must be for an eligible student attending an eligible educational institution. An eligible institution is any accredited college, university, vocational school, or other postsecondary institution that can participate in the student aid programs administered by the U.S. Department of Education. The student must be enrolled at least half-time in a program that leads to a degree, certificate, or another recognized educational credential.
Not all loans taken out for education will meet the IRS definition. A restriction is that the loan cannot come from a related person, which includes parents, siblings, or grandparents. Similarly, funds borrowed from a qualified employer plan, such as a 401(k), do not count as qualified education loans for this tax deduction.
Taxpayer Eligibility for the Interest Deduction
Beyond the loan’s characteristics, a taxpayer must meet several personal criteria to be eligible to deduct the interest paid. A requirement is that the taxpayer must be legally obligated to repay the loan. If a loan is in a student’s name, only the student can claim the deduction, even if a parent makes the actual payments. The IRS treats payments made by the parent as a gift to the student, who is then considered to have paid the interest.
A taxpayer’s filing status impacts their ability to claim the deduction. Individuals who use the “married filing separately” status are prohibited from taking the student loan interest deduction. All other filing statuses are permitted to claim the deduction if they meet the other requirements:
- Single
- Married filing jointly
- Head of household
- Qualifying surviving spouse
Another condition relates to dependency. A taxpayer cannot claim the student loan interest deduction if they can be claimed as a dependent on someone else’s tax return. For example, a recent graduate who is still claimed as a dependent by their parents cannot take the deduction. In this scenario, neither the student nor the parents get the deduction.
A limitation on eligibility is based on a taxpayer’s modified adjusted gross income (MAGI). For the 2024 tax year, the deduction is gradually reduced for taxpayers with a MAGI between $80,000 and $95,000 for single, head of household, or qualifying surviving spouse filers. For those who are married and filing a joint return, this phase-out range is between $165,000 and $195,000. A taxpayer whose MAGI is above these upper limits cannot claim the deduction.
Calculating and Claiming the Deduction
The process of claiming the student loan interest deduction begins with information from the lender. If a taxpayer paid $600 or more in interest on a qualified student loan during the year, the lender must send them Form 1098-E, Student Loan Interest Statement. Even if a taxpayer does not receive this form because they paid less than $600 in interest, they are still entitled to deduct the amount paid by checking their loan statements.
The deductible amount is the lesser of two figures: the total interest paid during the year or $2,500. A taxpayer can never deduct more than the annual cap of $2,500, regardless of how much interest they actually paid. The instructions for the federal income tax return include a worksheet to help taxpayers figure the precise deduction amount if their income falls within the phase-out range.
Once the final deductible amount is determined, it is reported as an “adjustment to income” on Schedule 1 of Form 1040. This is an “above-the-line” deduction because it is taken before adjusted gross income is calculated. This means a taxpayer does not need to itemize their deductions to claim it.