Loan Interest Deduction

The Taxpayer Relief Act of 1997 permits borrowers to deduct some of the interest paid on their student loans when they file their tax returns. Taxpayers who have taken out loans to pay for the cost of attending an accredited college for themselves, a spouse, or a dependant may be eligible for this deduction. The tax deduction is available only for interest payments made during the first 60 months in which interest payments are required.

The maximum deduction each taxpayer is permitted to take will be limited initially to $1,000 but will be increased annually by $500 increments. Check with www.irs.gov for this years’ current deductions :

Tax Year

Maximum Deduction

1999

$1,500

2000

$2,000

2001 & thereafter

$2,500

Q:

Who is eligible to take the deduction?

A:

The deduction is available for any borrower with a “qualified” student loan. Taxpayers who have obtained loans to specifcally pay for the cost of attendance at an accredited college for themselves, their spouse, or dependent may deduct the amount within the limits specified above of interest paid on their educational loan.

Q:

What loans qualify for the deduction?

A:

All StaffordPLUSCitiAssist® and Consolidation loans and all other consumers loans which are specifically for higher education purposes.

Q:

Are there any loans that aren’t eligible?

A:

As long as the borrower has certified their loans as being used for educational purposes they may be eligible for this tax deduction.  You may need to file a IRS form W-95 with your lender.

Q:

How long can one claim the deduction?

A:

The deduction can currently only be taken for interest paid during the first 60 months of the repayment period in which payments are required, which may be extended based on those periods of time your loan(s) are in grace, on a deferment or forbearance.

ie. You begin making payments on your loan(s) on 07/98 and on 08/99 you apply for a deferment that lasts for 12 months. The total amount of repayment time you have used is 13 months; which makes you eligible to continue to deduct the interest for 47 months.

Q:

How do I know how much interest I can deduct?

A:

Citibank and other lenders will send all eligible borrowers of FFEL loans a 1098E form stating the amount of interest paid for the year. The taxpayer is responsible to determine how much of that amount they are eligible to deduct on their income tax. To ensure receipt of 1098Es or other consumer loans, borrowers should file IRS Form W-9S with their lenders.

Q:

Are there any limits on who may take the student loan interest deduction?

A:

Yes. There are income restrictions. To claim the maximum deduction, a taxpayer must have modified adjusted gross income of $55,000 or less ($75,000 for married taxpayers filing jointly).  The amount of the taxpayer’s deduction is gradually reduced for taxpayers with modified adjusted gross income between $40,000 and $55,000 (between $60,000 and $75,000 for married taxpayers filing jointly). For example, for 1998, the maximum deduction a single taxpayer with modified adjusted gross income of $47,500 could take would be $500. Taxpayers with modified adjusted gross income above $55,000 ($75,000 for married taxpayers filing jointly) may not claim the student loan interest deduction. The modified adjusted gross income limitations are indexed for inflation after 2002.

As a reminder, you should seek advice on how to get the best use of the aforementioned benefits to a qualified financial advisor.

Q:

May a parent claim the student loan interest deduction if the parent borrows to pay his/her child’s costs of attending college?

A:

Yes. An individual may claim the student loan interest deduction if the individual borrows money to pay the costs of attending college for certain members of the individual’s family or household (including his/her children) and incurs the debt in a year in which the individual supplies more than half of the student’s support.

Q:

If a student is claimed as a dependent by their parent(s) in a particular taxable year, may the student claim any interest that he/she pays in that year?

A:

No. The student may not claim the student loan interest deduction in any taxable year in which they are claimed as a dependent on another taxpayer’s return.

Q:

When does the deduction take effect?

A:

Interest paid on or after January 1, 1998 is eligible to be deducted within the limits. However, taxpayers may start claiming the deduction in 1999, when they file their federal income tax returns for 1998.

Q:

Is there a limit on how long a borrower can claim the deduction?

A:

Yes. A taxpayer can deduct the interest paid during the first 60 months of a loan’s repayment period. This 60-month period is extended by any periods of gracedeferment or forbearance.

Q:

Is a borrower who is already in repayment eligible to take the interest deduction?

A:

Yes. A borrower may deduct the interest-portion of any loan payments made on or after January 1, 1998, provided that the borrower is still in the first 60 months of repayment. They must also meet the income limitations and the amount deducted is limited as well.

Q:

Are CitiAssist® Loans eligible to take the interest deduction?

A:

Yes. Loans taken out for educational purposes may be eligible for the interest deduction. The borrower must obtain a W9S and forward it to Citibank or their other lenders, the W-9S form certifies that these loans were used for educational expenses. To obtain this form, you may contact the IRS at 1-800-TAX-FORM.

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