Student-loan borrowers may deduct an additional $500 in interest

Taxpayers May Qualify for Higher-Education Tax Benefits

INDIANAPOLIS—As the federal tax-filing deadline nears, USA Funds®, the nation's largest education-loan guarantor, reminds taxpayers to take advantage of tax benefits to reduce their higher-education expenses. For example, taxpayers who borrowed money to pay for college may qualify to deduct an additional $500 in interest that they paid on their student loans in 2000. USA Funds notes that the maximum student-loan interest deduction has increased to $2,000 for the 2000 tax year, up from $1,500 in 1999.

Taxpayers may deduct only the interest that they paid during the first 60 months that interest was required on their education loans. Other limitations on the deductibility of student-loan interest include the following:

  • Income. The deduction phases out for single taxpayers with modified adjusted gross incomes of $40,000 to $55,000, and for married taxpayers with modified adjusted gross incomes of $60,000 to $75,000.
  • Filing status. Married taxpayers must file jointly to claim the deduction. Taxpayers must file Form 1040 or Form 1040A to claim the deduction, although taxpayers do not have to itemize their deductions to use the student-loan interest deduction. Student-loan borrowers who are claimed as a dependent by another taxpayer do not qualify to take the deduction.
  • Types of loans. Federal education loans, private education loans, and home-equity loan proceeds used to pay qualified higher-education expenses are among the loan types that qualify for the deduction. Personal loans from relatives do not qualify.
  • Types of education expenses. To qualify for the deduction, the funds must have been borrowed for qualified education expenses, including tuition, fees, room and board, books and supplies.

If a borrower paid $600 or more in student-loan interest last year, lenders and loan servicers are required to send a statement to the borrower and to the Internal Revenue Service. To claim the deduction, taxpayers should complete the "Student Loan Interest Deduction Worksheet" in their tax-form instructions and report the amount of the deduction on line 24 of Form 1040 or line 17 of Form 1040A.

In addition to the student-loan interest deduction, taxpayers may qualify for the following tax credits to help defray education costs, although taxpayers generally cannot claim more than one benefit for the same education expense:

  • Hope Credit. Students, their parents or their guardians have the opportunity to claim up to $1,500 for each student for out-of-pocket tuition and fees. The credit is available for each of the first two years of classes toward a degree or certificate from a college or vocational school. Students must be enrolled at least half time to qualify for the credit.
  • Lifetime Learning Credit. This credit is available for any education beyond high school, including vocational, college, graduate and professional education. The amount that a taxpayer may claim under this tax credit equals 20 percent of the first $5,000 of qualified expenses, for a maximum of $1,000.

For more information on higher-education tax benefits, taxpayers may access IRS Publication 970, "Tax Benefits for Higher Education," online at www.irs.ustreas.gov, or consult with their tax adviser.