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Education Loan Interest

By: EconomyWatch Content Date: 26 November 2009

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Education loans are an essential source of financing for higher education. The interest rate and other repayment terms of a student loan are less burdensome than other sources of credit, such as student credit cards. Nonetheless, an education loan interest creates fixed debt obligation on the student, which if defaulted, can lead to detrimental outcomes. Wage garnishment and bankruptcy are common threats of education loan default.

Education Loan Interest Deduction: Eligibility

An important relief with respect to a student loan is the fact that the interest paid on it qualifies for several tax benefits. To qualify for an education loan interest deduction, a borrower must fulfill the following criteria:

S/he was enrolled in a recognized program, which is affiliated to or offers credentials bestowed by an eligible educational institution
Interest was paid on a qualified education loan
Exemption has not been claimed by anyone other than the borrower

In addition to claiming interest deduction on a loan obtained for financing self education expenses, one can claim deductions on a loan taken for the education of a spouse or a dependent.

To claim such education loan interest deductions, one must fulfill the following requirement:

S/he is legally obligated towards making the interest payments
S/he makes the repayments during the applicable tax year
S/he claims exemption for a spouse/dependent on his/her tax return

Educational Loan Interest: Considerations

For the purpose of an education loan interest deduction, the expenses include:

Tuition fee and other such charges
Accommodation expenses
Books, equipments and other supplies
Other essential expenses like transportation.

In this case, accommodation expenses pertain to either the actual housing cost that is charged by an educational institution or an estimate provided by the institution, if a student is using private accommodation.

To qualify for interest deduction, expenses must pertain to a definite academic period. In this context, an academic period may be a semester, trimester, quarter or a calendar year. The loan proceeds must also have been disbursed between 90 days, beginning and ending the academic period. This additional period of 180 days is called the ‘safe harbor’ period.