Getting a Student Loan Interest Deduction

Dear Tax Talk,My husband was ordered by court to pay one-third of his daughter's educational loans (his ex pays one-third and his daughter one-third). None of the loans are in his name. If my husband pays directly to the creditor or institution, will he be allowed to deduct one-third of the interest of the loans he's paying on? If so, how should he go about obtaining his share of the interest amount from his ex and/or daughter?-- Maria

Dear Maria,Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income, or MAGI, is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. The maximum deduction of $2,500 reduces your AGI; you do not have to itemize deductions to claim the interest expenses.

One of the keys to claiming the interest deduction is that the student had to be your dependent at the time the loan was taken out. Generally, your dependent is someone who is either a:

  • Qualifying child, or
  • Qualifying relative.

If the ex-wife claimed the daughter as a dependent, then your husband is not entitled to the interest deduction.

If your husband was able to claim her as a dependent, then he'll need a copy of Form 1098-E to claim the interest paid. Generally, an institution, such as a bank or governmental agency, that received interest payments of $600 or more during 2010 on one or more qualified student loans must send Form 1098-E (or an acceptable substitute) to each borrower by Jan. 31, 2011.

If your husband cannot claim the interest deduction, then perhaps both parents may want to let the daughter claim it. If the daughter is legally obligated to make interest payments and someone else makes a payment of interest on her behalf, she is treated as receiving the payments from the other person and, in turn, paying the interest.