Graduate Program Loans and Available Tax Incentives- How Your Parents Can Loan You Money and Get Tax Savings


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Graduate program loans are something students turn to when they need to fund their education. It is a risky option but there is good news.

Interest paid on graduate program loans is tax deductible and there are other tax incentives available. Tuition and fees paid through loans can be offset with tax credits. Your cosigner usually your parents can breathe a sigh of relief.

Student loans are a great boon because it helps you pay for tuition if you don’t have money readily available. However, paying off student debt is a long-term struggle and many millennials find themselves saddled with debt as they start their professional career.

Tax credits and tax deductions may just be the thing that will save you from drowning in debt.

Tax deductions lower your taxable income. A couple of tax deductions you can use are the Student Loan Interest Deduction and the Tuition and Fees Deduction. Yes, it can be a lifesaver.

Another way of getting savings is through tax credits, which reduce the amount of taxes paid. The two credits that can be used are the American Opportunity Tax Credit and the Lifetime Learning Credit.

There are guidelines to using these deductions and credits but you have to make sure you understand its complexity and that you qualify. If you think you are eligible, consult with the IRS or a tax consultant to know further details.

Student Loan Interest Deduction and How You Can Use It for Graduate Program Loans

Borrowers can use the Student Loan Interest Deduction to reduce their taxable income by as much as $2,500. Your gross income must, however, fall below specified limits.

The student who took the loan must be you, your spouse, or your dependent usually your children. The money must be used exclusively for education-related expenses and the money should be used for expenses by someone who is enrolled at least half time to qualify.

As long as they are legally responsible for repaying the loan and cannot be claimed as an exemption on another’s tax return a taxpayer, spouse or dependent can take the deduction. Until the loan is paid off, all interest paid during the tax year can be deducted up to the legal limit. Even if the taxpayer does not itemize deductions the deduction can be claimed.

Expenses allowed by the loan include:

  • Tuition and fees
  • Books and supplies
  • Room and board
  • Other necessary expenses

Your gross income should fall below 80,000 for single individuals and 165,000 for couples with joint incomes. If your gross income is more than 65,000 as an individual or more than 165,000 for a couple you do not qualify for the deduction.

Graduate Program Loans and Tuition and Fees Deduction

Another deduction you can get is The Tuition and Fees Deduction which can reduce your taxable income by as much as $4,000. It is available to single filers whose gross income isn’t higher than $80,000 and married filers whose joint account doesn’t exceed $160,000. The deduction applies only to tuition and fees at eligible post-secondary educational institutions and can’t be applied to room and board.

Even if you paid for them with borrowed money you are permitted to take the deduction for qualified expenses. This deduction still allows you to take the Student Loan Interest Deduction.

It is important to note that you cannot take the Tuition and Fees Deduction under certain circumstances:

  • you are married and filing taxes separately
  • You are dependent on someone’s tax return
  • You claimed either Lifetime Learning or The American Opportunity tax credits in the same tax year
  • During any part of the tax year, you elect not to be treated as a resident alien and you are a non-resident alien
  • Expenses paid by scholarships or awards, or a tax-free withdrawal from a college savings plan are not eligible

Lifetime Learning Credit

This credit gives you as much as $2,000 per year and is aimed at low- and middle-income filers who paid for post-secondary education but don’t qualify for a tax break under the American Opportunity Tax Credit strict requirements.

You don’t need to be pursuing a Graduate degree or to be enrolled at least half time like the American Opportunity Tax Credit. It also eliminates the AOTC limitation to obtaining a credit only during the first four years in a degree or certificate program.

There is no limit on the number of years a credit can be claimed. This makes the credit helpful to graduate students, students who are attending school less than half-time and those taking classes to improve or acquire job skills and not necessarily to get a degree.

Eligible expenses include:

  • tuition, fees and any
  • books and equipment required by the school.

This Credit cannot be used for:

  • room and board or for
  • all expenses that were paid for by a grant, scholarship, employer or education savings
  • if either the American Opportunity Tax Credit or the Tuition and Fees Deduction is claimed the Lifetime Learning Credit cannot be used anymore.

The credit can give you up to 20% deduction on the first $10,000 of qualified expenses. One deduction is allowed for each tax return. A parent who has more than one student in college can only have one Lifetime Learning credit taken.

This credit is available to individuals with a gross income of $55,000 and couples with a joint income of $110,000.

American Opportunity Tax Credit

You can’t claim the American opportunity credit if you’ve finished your first four years of post-secondary school before the start of the year.

However, if you graduated in the spring and started graduate school in the fall and if that tax year is no more than the fourth year you have claimed the credit this leaves open the possibility of using the American opportunity credit for your first semester of grad school.

The American opportunity credit with $2,500 maximum credit is larger than the other tax breaks and up to 40 percent is refundable. If you don’t owe any taxes, you’ll get up to a $1,000 refund. You can include the cost of books and other supplies when figuring the credit.

You still have to meet several other requirements If you use the American opportunity credit for grad school. You can’t have any felony drug convictions on your record. Secondly, you must be enrolled at least half-time and be pursuing a specific degree. Thirdly, whoever is claiming you as a dependent can’t have a modified adjusted gross income of $90,000 or more ($180,000 or more if married filing jointly) and can’t use the married filing separately filing status.

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