Qualified Education Loan Interest Deduction
Law Requirements for Deductibility
New Section 221 of the Internal Revenue Code enacted as part of the Taxpayer Relief Act of 1997 allows an "above-the-line" deduction from adjusted gross income for interest on education loans. More specific deductibility requirements are as follows:
the deduction is limited to a period of 60 months commencing? on January 1, 1998 or with the month in which payments are required, and continues regardless of whether payments are actually made, unless the repayment period is suspended for deferment or forbearance. The 60 month period may run out at different times for different loans. Also, a qualified loan and any related refinancings are considered one loan for purposes of this 60 month rule
interest must be paid or incurred within a "reasonable" period of time before or after the taxpayer became obligated on the loan
no deduction can be taken by an individual for a tax year in which the dependency exemption is allowed to another taxpayer the loan must have been incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer; there is no deduction allowed for interest paid on a "mixed purpose" loan or on a revolving line of credit the loan must be attributable to education furnished during a period during which the recipient was an eligible student the education expenses are reduced by any amounts excluded from gross income under IRC Sections 127, 135 or 530, and the amounts of any scholarships, allowances, or payments described in IRC Section 25A(g)(2) and the loan is one incurred solely to pay "qualified higher education expenses" (tuition, fees, room, board, books, transportation)
Maximum Allowable Deductions Per Year 
The deduction shall not exceed the following amounts: 1998 $1,000 1999 $1,500 2000 $2,000 2001 and thereafter $2,500
Phase-Out
The maximum allowable deduction is reduced and phases out when a taxpayer¯s modified adjusted gross income exceeds certain amounts. Modified adjusted gross income means AGI without the education loan deduction, the exclusion for US Savings bond interest used to pay higher education expenses, exclusion for employer-paid qualified adoption expenses, foreign earned income and housing costs, and the exclusion for income form certain US possessions and Puerto Rico. Filing Status Phase-Out Range(Modified AGI)
Married filing joint return $60,000 - $75,000 Married filing separately No deduction is allowed Single, head of household $40,000 - $55,000
No Double Benefit
The law does not permit a double deduction. So if interest on an equity line of credit used solely for qualified education expenses is allowed towards computing AGI, then it cannot be used on Schedule A.
Loans from Other Than Financial Institutions
Loans from anyone related to the taxpayer taking the education loan interest deduction will disqualify the loan and prevent the legal deduction of the interest towards AGI. The interest might still be deductible on Schedule A if secured by a principal residence.
Solutions to Problems
The dependent rule prevents parents who cannot claim the deduction because their income is too high from shifting the deduction to the student/child by having the child take out the education loan. Taxpayers may want to consider having the child take out a loan or refi loans at a time, say after graduation, when the child will no longer be a dependent. The revolving line of credit rule is kind of harsh if it is to be taken literally. While that is the conservative way to interpret it, the situation may leave open the possibility that a line of credit used solely to finance qualified education expenses may pass muster
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