Tax Advantages Explained.

We open this page with a disclaimer. We at American Student Loan Services are not tax professionals. The information below is only provided as a courtesy to families who borrow money for college and should not be interpreted as tax advice. All the information summarized below is available in its entirety at www.irs.gov. Publication 970, "Tax Benefits of Higher Education" will answer many of your questions. We recommend you consult that site or your tax professional before attempting to claim deductions for interest paid on higher education loans.

Since we're not Certified Financial Planners, we recommend that you locate one. Certified Financial Planners (CFP's) assist people in structuring their finances to maximize profit potential. Check with friends or relatives to see if they know any good CFP's in your area who can help you plan financially for your child's education. Concerning finances, we will offer this one word of advice - do not place savings in your student's name. This makes you (or your student) eligible for less need-based aid. Put all of the student's savings in the parent's name.

Is the interest on various federal student loans tax deductible?

In many cases, yes. According to the Taxpayer Relief Act of 1997, students and parents of dependent students may deduct all or part of the interest paid on student loans if they meet certain requirements.

You may not claim a deduction if:

• Your parents claimed you as a dependent on their tax forms (they may be able to take the deduction, though).
• Your modified adjusted gross income (AGI) is above $75,000 for those that are married jointly, $55,000 for those that are single. To determine modified AGI, see form 1040 or 1040A.
• The beneficiary of the loan was not enrolled at least half-time at an eligible institution in a degree program (the overwhelming majority of students at 4-year schools meet this requirement).
• You did not borrow the money for yourself, a spouse, or a dependent.
• You are married and filing separately.
• You file form 1040EZ.

How much can I deduct?

Again, you may only deduct the interest that you paid on the loan, and only that which was paid in the first five years of repayment. You should have received a statement from the company servicing the loan that details how much interest you paid for the year. If you didn't receive such a statement, request one. For the year 2000, the maximum deduction allowed is $2,000. After that it increases to $2,500 per year. Whether or not you can take the full deduction depends on your income level, the amount of interest you paid, and your general eligibility.