The deduction applies to the first 60 months in which interest payments are required on qualifying loans for the benefit of the taxpayer, taxpayer's spouse, or taxpayer's dependent at the time that the debt was incurred. The 60-month period begins on the date the loan enters repayment status and ends 60 months later.
Loans that qualify are defined as any indebtedness incurred by the taxpayer solely to pay for college or vocational school expenses on behalf of a student enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credentials. Tuition, fees, room and board, books, equipment and transportation are expenses that qualify if paid to attend an eligible institution. However, these amounts must be reduced by any nontaxable education benefits received such as employer provided educational assistance, nontaxable distributions from an education IRA, Series EE bond interest education exclusion, or veteran's educational benefits. For a loan to qualify the student must be the taxpayer, the taxpayer's spouse, or the taxpayer's dependent at the time the indebtedness is incurred.
Qualified higher education expenses must be incurred within a reasonable period of time before or after the indebtedness is incurred. As noted in the Federal Bulletin, dated February 8, 1999, one reasonable period of time is to pay all expenses within 60 days prior to the start of that academic period or 60 days after the end of that academic period. Loans issued as part of a federal post-secondary education loan program automatically meet the requirement for payment within a reasonable period of time.
Caution: IRS Restructuring and Reform Act of 1998 requires loans be incurred solely to pay qualified higher education expenses, therefore, mixed use loans are not qualified education loans. Similarly, revolving lines of credit, credit cards, and debt cards generally are not qualified education loans, unless the borrower uses the line of credit solely to pay qualified higher education expenses. A loan made by an individual who is related to the borrower and loans made under any qualified employer plan or made pursuant to any contract purchased under a qualified plan are not qualified education loans.
1098-E is required to be issued by any lender receiving $600 or more qualified education loan interest. Taxpayer must notify lender that the loan is used for education expenses.
