There is no requirement that a taxpayer must trace the loan proceeds to qualify for the student loan interest deduction.

Specific Details

In August, Ron borrows $9,000 from a local bank for the purpose of paying his tuition and board for the fall semester at Minnesota University. Ron deposits the loan proceeds in his personal checking account, and immediately expends the funds on a world vacation. In September, Ron starts school, and arranges a monthly payment plan for his tuition and board with the university. Ron covers these monthly payments to the school through part-time work. Because the loan proceeds were disbursed within an appropriate time frame, and there does not have to be an actual tracing of the loan proceeds to the payment of the higher education expenses, Ron will be able to deduct the interest expense on the student loan.

Potential Savings

You can qualify for the student loan interest deduction of $2,500 per year. If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by qualifying for the student loan interest deduction.