Deductible student loans

Deductible student loans

Host : OK, but what happens if I've already graduated from college and I'm saddled with student loans. Any relief?

David : Yes. There's a new student loan interest deduction. This is a deduction, so it's different from the credits we were talking about a minute ago. Bear in mind a dollar in credits cuts your tax liability by one dollar, but a dollar in deductions only cuts your liability by maybe 28 cents.

Anyway, in 1998 you can deduct $1,000 of student loan interest, and the amount you can deduct increases by $500 annually up to a maximum of $2,500 which you can deduct in 2001 and later years.

And this is a so called "above-the-line" deduction. This is good because you don't have to itemize to deduct the interest.

Host : Are there any phase-outs or other gotchas with this deduction?

David : Yes. This phases-out at $40,000 on a single return, and $60,000 for a joint return. Also, it only applies to the first 5 years of interest payments on student loans.

Host : Is there any other assistance for college students?

David : Yes. Congress extended the $5,250 exclusion for undergraduate education. This again is different from a credit or deduction.

Here, if your employer pays for your college education, you don't have to include that compensation in your taxable income. This has been around for a while, but Congress has extended it through 2000.

The new tax bill also strengthens prepaid state tuition programs. These programs allow you to contract with a state's universities to lock in your education costs. They also allow for tax-free growth in the savings. The new tax bill now allows you to pay for room and board, as well as tuition, through these state-sponsored programs.