If you or your children borrowed to finance post-high school education, you’ll have to repay the loan, plus interest.
* First, the good news. The loan interest may be tax-deductible. The interest deduction is "above-the-line," so you can take the deduction even if you don’t itemize deductions. An above-the-line deduction lowers your adjusted gross income, which may allow you to qualify for other tax breaks.
Moreover, the deduction is not limited to the student for whose expenses the loan was obtained. If John Smith borrows money to pay for his daughter’s college bills, he may qualify for the interest deduction.
* Now for the downside. The maximum deduction is $2,500 per year. To get that $2,500 deduction, you not only must spend at least $2,500 on student loan interest, your income can’t exceed $60,000, or $120,000 if you’re married and file a joint tax return. With income up to $75,000 (single) or $150,000 (joint returns), you can take a smaller deduction. No matter what your income, you can’t take any tax deduction if the loan was from a relative or from an employer’s retirement plan.
If the income limits or the deduction limits concern you, you might consider borrowing against your home equity. Home equity loan interest is generally deductible on loans up to $100,000, and there is no income limit on that deduction.
