Student Loan Interest Deduction

If you paid interest on a student loan in 2001, you may be eligible to deduct some or all of the interest you paid, whether the loan was for your own education, your spouse's, or that of a child or anyone else who was your dependent at the time the education was undertaken.

However, only interest paid in the first 60 months that interest payments are required is deductible and the maximum deduction is $2,000 for 2001 and later years. If you refinance the loan you can still claim the deduction, but refinancing does not extend the original 60-month period. The 60-month loan limitation is removed for any loan interest paid after 2001. Also, through 2001 (but not beyond), the definition of required payments of interest does not include voluntary payments, like interest you pay during a period of loan forbearance.

In 2001, the deduction is phased out for those with modified adjusted gross income (AGI) between $40,000 and $55,000 if you are single, or between $60,000 and $75,000 if filing a joint return. For 2002, the AGI phaseout ranges are between $50,000 and $65,000 for singles and between $100,000 and $115,000 for joint return filers. You can't claim this deduction at all if you are married filing separately, or if you can be claimed as a dependent on someone else's return.

For purposes of this deduction, "modified adjusted gross income" is computed by taking the AGI amount from Line 33 of Form 1040, and adding back any foreign earned income exclusion, foreign housing exclusion or deduction, and the exclusion of income for residents of American possessions.

To figure the limit, take the portion of your modified AGI that exceeds $40,000 (or $60,000 if you are married filing jointly) and divide it by $15,000. The resulting decimal should be multiplied by your interest deduction to determine the amount that you will lose due to your high level of income.

Claiming the deduction. You don't need to fill out any special forms to claim the student loan interest deduction, and you don't need to itemize your deductions to take advantage of it. The deductible amount is simply written on Line 24 of Form 1040, or Line 17 of Form 1040A, and subtracted from your income.

Be careful. Not all student loans qualify for the deduction.