Existing Student Loan Interest Deduction Rules

The student loan interest deduction is one of the few tax benefits that favors the taxpayer with limited income who doesn’t own a home, has no children, and otherwise would be hard-pressed to find a way to lower his or her tax bilL

Under current law, taxpayers with income of less than $80,000 ($160,000 if filing a joint return) can deduct from their taxes the amount paid for interest on qualified student loans. This adjustment to income, available to taxpayers even if they don’t itemize their deductions, can reduce the amount of income subject to tax by up to $2,500 per year.

For interest on the loan to be deductible, it must have been incurred for payment of qualified educational expenses of the taxpayer, his or her spouse, or a dependent. Loans taken from relatives or an employer’s retirement plan don’t count, but the loan doesn’t lose its status if the taxpayer later gets divorced or the dependent becomes self-supporting. A student loan for your child, for example, would qualify even if the child eventually moves out of the house and gets a job of his or her own.

The student must be enrolled at least half-time in a program leading to a degree or certification at a college, university, vocational school, or other postsecondary educational institution eligible to receive federal student loans. Certain educational institutions located outside the United States, as well as institutions conducting internship or residency programs leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training also qualify.

The deduction provides a benefit to millions of taxpayers each year as they try to balance their student loan obligations with the demands of making ends meet. Given the income limitations, it comes as no surprise that the  student loan interest deduction is important to people who need the money most.

This is exactly the benefit the Trump tax reform plan seeks to eliminate. But the Administration claims the overall benefit to the middle class will far outweigh the loss of this crucial deduction.