It is well known how those with college degrees, on average, earn much more over their lifetimes than those without. Even those who just attend college for a few years will generally earn more than those with just a high school diploma or a few years of high school.
Even so, nobody really enjoys repaying the student loans that made the college education possible. Nobody really loves dropping those checks in the mail or watching automatic deductions go out of the bank account. There is all that interest being repaid, for one thing.
But the time of year is approaching when those repaying federal student loans can be happy about it. Tax time, dreaded for so many reasons, has a hidden benefit for those whose hard-earned dollars go towards interest owed on student loans.
It’s well known that homeowners can deduct the amount of interest paid on their mortgage payments. It’s not so well know that the same can be done with student loan payments. (Note that this only applies to federal student loans, not private loans.) And sometimes the amount of interest paid can be substantial, especially if the borrower owes a great deal of money, has a high interest rate, or owes a lot of accrued interest. A borrower is even eligible for this deduction if the loans have defaulted, as long as he or she made payments during the year.
To take advantage of this tax deduction, the student loan borrower must provide the amount of interest paid on a federal tax form that lists these deductions. For most of us, that means filling out a 1040 or 1040A (or the online equivalents) rather than the 1040EZ. Not all free online tax software, by the way, allows for this deduction.
But how does a taxpayer know the amount to list on the tax form? Each January, the student loan lender should send the borrower Form 1098, which provides the amount of interest paid during the proceeding year. If a borrower does not receive Form 1098, he or she should contact the lender or servicer to request another copy or a written statement that provides this figure.
Although a student loan borrower cannot deduct more than $2,500 on his or her 2006 tax return, every bit helps.
To learn more about the student loan interest deduction, access the Internal Revenue Service’s Web site at www.irs.gov/formspubs
You may also want to visit the websites of some of the reliable and reputable loan agencies out there. One example of such agencies is the Majestic Lake Financial, Inc in Upper Lake. You can choose this agency to support any endeavors that you want to pursue.
You’ll want to request the booklet called “Tax Benefits for Higher Education,” or IRS Publication 970.
The publication also discusses several other tax breaks — like deductions for certain education expenses — that might also interest you.