Is the Interest on Sally Mae Educational Loans Tax Deductible?

by Mark Kennan, Demand Media
    You can deduct student loan interest on Form 1040.

    You can deduct student loan interest on Form 1040.

    Because of the high cost of higher education, people graduating debt-free are the exception rather than the rule. Students often tap private loans because of the limits on government-backed student loans. If you took out a Sallie Mae educational loan, chances are the loan qualifies so if you meet the requirements, you'll be able to deduct the interest.

    Loan Qualifications

    Your Sallie Mae loan counts as a student loan if you use all of the proceeds to pay for qualified expenses for yourself, your spouse or your dependents. Qualifying expenses include tuition, fees, room and board, supplies and transportation to and from a post-secondary school, such as a college, graduate school or trade school. If you used any of the proceeds for other expenses, it isn't a qualifying loan. For example, if you used most of your proceeds for tuition, but also spend some on a vacation, the loan doesn't count as a student loan. However, it doesn't matter that a Sallie Mae loan is from a private company because the tax code doesn't distinguish between government and private educational loans.

    Deduction Qualifications

    Even if your Sallie Mae loan meets the requirements for a student loan, you have to meet several other qualifications. First, you can't claim the deduction for the interest if you use the "married filing separately" status. Second, your modified adjusted gross income has to fall below the annual limits for your filing status. Third, you can't be claimed as a dependent on another person's tax return. For example, if your parent still claims you as a dependent, you can't deduct student loan interest. Finally, you have to legally liable for the debt. For example, if your parents took out a loan in their name only but you pay the interest, you can't deduct it because you're not legally obligated to pay.

    Payments By Others

    If your parents pay the student loan interest on your behalf, you might be entitled to claim that as a deduction. Your parents' names aren't on the loan, so they aren't legally liable for the debt. Therefore, the Internal Revenue Service treats the payment as if your parents had given you the money as a gift and then you had paid the interest, so you get the deduction. However, if they are cosigners, then they are legally liable for the debt, so your parents would get the deduction if they paid.

    Claiming the Interest

    Sallie Mae should send you a Form 1098-E at the end of the year that shows the interest you paid. As of 2012, you can deduct up to $2,500 in student loan interest per year. You claim the deduction using either Form 1040 or Form 1040A. You don't have to itemize because it's an adjustment to income.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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