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Thing You Want To Know About Education Loan Deduction ?

  Sanjiv Gupta CPA  Published 
Thing You Want To Know About Education Loan Deduction ?

Educational loans have become quite popular these days. Students who cannot fund their education independently are facilitated by such loans. This article deals with education loan deduction or the grants that are applicable only for higher education.  Loan whatever be the kind, educational or for business has to be repaid with interest. This is a basic understanding. Interestingly educational loans (tuition and fees deduction) can cut down your tax liabilities by almost $4,000. And yes, this is true! This deduction is treated as an adjustment to income. You can claim it without having to categorize deducible contents. Let’s analyze points one by one.


How to calculate education loan deduction?

Deductions are stipulated on the basis of Modified Adjusted Gross Income (MAGI). MAGI is calculated on the federal tax returns. Student loan interest deduction is calculated much after. This will definitely reduce your tax amount payable on your income ($2,500 by 2010)

 What makes an institution eligible to apply for a student’s aid program?

Us Department of Education’s Federal Student aid programs is available to those institutes which can comply with federal rules of participating in student interest loan program. This includes centers offering higher secondary, graduation and post-graduation degrees on general, engineering and health care domains. Institutions must bear proper affiliation certification as per the terms of the US Department of Education.

 Who is eligible for the deduction?

Loans are acquired as for personal studies, financing study of a spouse or other dependents. Students who have a High school diploma or General Educational Development credential can apply for the loan. For students who are both guarantors and applicants, they need to submit authentic employment papers (containing the name of the organization, duration of the employment period, salary). If the guarantor is a relative then he/she should produce the same.   The loan must be able to suffice just the academic period of the student. Institutions can guide fairly on eligibility and filing procedure. The following points are to be complied with when claiming for a deduction:

  •  No third-party tax exemption claim with reference to a student loan.
  • Legal obligation to pay interest on a qualified student’s loan
  • Paid interest for a qualified student loan.

 Fields of education:

Work-related education, skill-enhancing education, education required by the employer, post-grad degrees, research, and higher studies: a student can choose from the above list when applying for the deduction.

 Expenses covered:

 At this point we will summarize all those expenses that are covered by educational loans until the end of the academic session. This will include:

  • Tuition fees
  • Lodging and boarding expenses
  • Textbooks, provisions and necessary tools and equipment
  • Other allowances (transportation, workshops, presentations, etc)

 Tax Benefit: Section 80E

Section 80E of the Income Tax Act lays down certain filing parameters (student’s interest deduction). The limitation was extended. No tax deduction is calculated either on

  • On the total expenses paid during the entire academic career of the student
  • Rs 40,000 whichever is less.

However please note here that there would be no deduction on principal re-payment. A considerable amount of interest will be deducted as according to the new regulation generated by the US Government.

 Closed assets for repaying expenses:

A student cannot use the below-stated funds when repaying academic expenses (tax-deductible):

  • Salaries/wages
  • Loan
  • Grant/ gift
  • Inherited assets
  • Periodic withdrawal from saving accounts

 Student loan interest:

Student loan interest is the interest paid during the period of qualification. As stated earlier such loans are issued only to support educational expenses: personal or of any dependent’s, acquired between the time before/after loan proposal, for the higher education of an eligible student.  However loan from a relative or sanctioned by an employer is not considered to be authentic student loan, which can be applied to attain deduction on the tax return.


Loaning for a dependent:

Loans are sanctioned on the basis of a guarantor’s income. The annual income report is screened by the authority who determines whether a guarantor will or will not be able to meet re-payment terms. Commonly the dependent is either a qualifying child or a qualifying relative. Certain exceptions are observed here:

  • The guarantor can be dependent on another taxpayer
  • An individual can be your dependent even if the individual files a joint return with a spouse.
  • Individuals those that have a Gross income equivalent to or more than the taxable amount can be dependent.

 Who can claim dependent’s expenses?

 To claim tuition and fees deduction on a dependent’s expenses you are to meet two requirements:

  • You must have paid the total expenses until the completion of the student’s final academic session
  • Claim exemption for the student as a dependent

 Tax benefits for education:

There are several programs that offer a deduction on interest and on tax payable against educational loans.  To name some, there are Section 529 plans; more like a savings account that enjoys certain tax-exemption, the American Opportunity credit, Publication 970, incentives for higher education, Lifetime Learning, and Hope credits, student loan interest deduction, Educational Assistance Plans, and American Recovery and Reinvestment Act.  Tax breaks are meant to aid eligible students to continue their studies. The deduction procedure pivots on the income group of the guarantor. Scholarships, however, are more like favors sanctioned after the student appears for certain types of merit test.

 Overviewing Plans:

Colleges saving plans are funded by the State government. If such funds are not used for educational purposes, then the state will impose a direct tax on the amount with an extra 10% as surtax.

 Tuition and fees deduction is calculated directly on the tax return without having to itemize the deductions. A single course application can also qualify a student to apply for such a deduction.

 Lifetime learning credit offers a straight $2000 deduction for any graduate-level course with minimum qualification for enrollment. The other credit, AmericanOpportunitycredit offered $2500deduction. Unfortunately, this scheme will be rendered inactive from 2012.

 Student loan interest deduction though offers a $2500 cut-out, it slowly phases out as the income level of the loan-holder increases.

 The IRS has published a detailed report on the several tax-benefit schemes that a student can apply for. Browse the net to know more about related topics.