So, how do you know whether you can take advantage of this deduction on your income taxes for student loan interest that was paid during the tax year?
First, you can claim the deduction if your filing status is "single" or "married, filing jointly," but you cannot claim it if you are filing as "married, filing separately." Also, if anyone else claims an exemption for you on his or her tax return, you won't be allowed to claim this deduction, but this is covered in more detail in the next section.
For qualification purposes, your income matters, too. Because the United States uses a progressive income tax, the more money you make, the heavier your tax burden. Similarly, the more money you make, the lower the amount of student loan interest is that you can deduct, and the deduction can even be obliterated if you make too much money to qualify for it at all. For example, if your MAGI for 2009 was more than $60,000 but less than $75,000 (or between $120,000 and $150,000, if filing jointly), the IRS will reduce the amount you're allowed to deduct. If your MAGI was more than $75,000 (or $150,000, if filing jointly), then you can say goodbye to this deduction altogether [source: IRS].
Unfortunately, you won't be able to use this deduction if your student loan was used to pay for anything other than qualified education expenses. The IRS gives a list of what kinds of things qualify as education expenses [source: IRS]. Obviously, tuition and student fees qualify, but so do room and board, books, equipment and necessary travel. If you open a revolving line of credit (a credit card) to pay solely for qualified education expenses, you can deduct the interest you pay on that as well. However, you cannot claim a credit for qualified education expenses paid with tax-free funds, such as veterans' education assistance [source: IRS].
The loan source might affect your qualification: If you got the loan from someone you are related to -- such as a parent, grandparent or spouse -- or through a qualified employer plan, you can't use this deduction. Student status also affects eligibility: You must have been enrolled at least half-time in an eligible education institution for this deduction to apply. Half-time standards are determined by the educational institution. If you're wondering whether your institution is eligible, call the administration office to ask.
Once you qualify, there are still a few more strings attached to this benefit. Up next, learn a few tips for dealing with them.