TAX NEWS - June 2010

Tax Q&A: College loan payments won't net tax break

Dear Dr. Don,

If I cash U.S. savings bonds in to pay off college loans, is the interest deductible? -- Randy Repay


Dear Randy,

It's not a tax deduction, it's a tax exclusion. But cashing in the savings bonds to make college loan payments doesn't qualify for the tax exclusion, because the loan payments don't meet the standard for qualified educational expenses.

The interest earnings on a savings bond can be excluded from the taxpayer's gross income if the savings bond proceeds are used to pay qualified education expenses -- and the bondholder qualifies for the exclusion. Here's how qualified expenses are defined on the TreasuryDirect Web page "Education Planning."

Qualified educational expenses include:

- Tuition and fees (such as lab fees and other required course expenses).
- Expenses that benefit you, your spouse, or a dependent for whom you claim an exemption.
- Expenses paid for any course required as part of a degree or certificate-granting program.
- Expenses paid for sports, games, or hobbies qualify only if part of a degree or certificate program.

Note: The costs of books or room and board are not qualified expenses.

The Web page also lays out additional requirements to qualify for this tax exclusion. The interest expense paid on the college loans, however, may be tax deductible. You can learn more about the Student Loan Interest Deduction by reading that section of IRS Publication 970, "Tax Benefits for Education," or by talking to your tax professional.