Tax Deductions for Student-Loan Interest / What are the rules for deducting student-loan interest on my tax return? / A New Pay-as-You-Earn Student Loan Repayment Plan

Kimberly Lankford for Kiplinger writes:   Answer:  Up to $2,500 in student-loan interest can be tax-deductible in 2013 if your modified adjusted gross income is less than $60,000 if you’re single or $125,000 if you are married and file a joint return. The deduction is phased out at higher income levels, disappearing completely if you earn more than $75,000 if single or $155,000 if filing a joint return.

You can take the deduction regardless of whether you itemize deductions. Even if your parents pay the interest on a loan for which you are liable, you can deduct the interest, as long as you are not claimed as a dependent on your parents’ tax return. 

Ann Kates Smith for Kiplinger writes:

A New Pay-as-You-Earn Student Loan Repayment Plan

Some students may get loan relief thanks to a new repayment program that can help ease the pressure on future grads.   Adam Minsky is a Boston attorney who specializes in student loan law. Still paying off his own loans, he is enrolled in an income-based repayment plan.   

How does the new repayment plan work?

The best way to describe it is in relation to the current income-based repayment plan. The IBR plan allows federal loan borrowers who qualify based on their income in relation to their loans to pay 15% of their discretionary income (the amount by which adjusted gross income exceeds the poverty line, accounting for family size). After 25 years, any remaining balance is forgiven. The new Pay As You Earn plan cuts payments to 10% of income and cuts the payment period from 25 to 20 years. 

Are all federal loans eligible for the plan?

No, only Direct student loans, funded by the U.S. Department of Education. Direct PLUS loans made to parents and consolidation loans that repay parent PLUS loans aren't eligible. The catch with Pay As You Earn is that it doesn’t apply to every borrower. To qualify, you can't have had outstanding federal loans as of October 1, 2007, and you have to have received a new loan on or after October 1, 2011. That effectively disqualifies most people in repayment now.

What can they do?

IBR will remain available for people who qualify. So will income-contingent repayment, which, like IBR, also has a 25-year repayment period but requires payments of 20% of income. The good news is that there are a lot of helpful programs. Consolidation can make management of loans easier. Forgiveness options are available, based not just on income but also on profession—such as public service.

What about students with private loans?

 None of these programs exist for private loans. Their terms are often worse, with higher rates, longer repayment and less-generous forbearance. Private student loan problems in this country are huge.

How many students will the new program help?

It's hard to say. But anything that ensures that college grads stay afloat is helpful. The consequences of defaulting on federal loans are severe. The government can garnish wages, offset federal benefits or seize tax refunds. And there's no statute of limitations; collectors can literally pursue you to the grave.