Student Loan Interest

• When you borrow money through a student loan, the lender will require you to pay the principal as well as interest on the loan. When you pay interest, the Internal Revenue Service allows you to deduct it from your taxable income. As of August 2011, the maximum amount that you could deduct for a qualified student loan is $2,500. If you paid less than $2,500 in interest, you can instead deduct that amount. By deducting this amount, you lower your taxable income, which could put you into a lower tax bracket.
  
  

Above the Line Deduction

• The student loan interest deduction is known as an "above the line" deduction. The deduction is available for anyone even if you do not itemize your deductions. You take the deduction before you get down to the line where itemized deductions are considered. You do not even need to complete a Schedule A on your 1040 to take advantage of this deduction, which makes the tax filing requirement easier to deal with.
  
  

Parents Paying Interest

• With most deductions, you only get to take advantage of them if you actually pay for the associated expenses. With a student loan interest deduction, this is not always the case. Your parents could pay the interest for you and you would get to take full advantage of the interest deduction. The Internal Revenue Service looks at this transaction as if your parents gave you money and then you paid your student loan interest.
  
  

Defaulting

• When you accumulate student loans, they are difficult to get forgiven short of paying them in full. Even if you file for bankruptcy protection, student loans typically cannot be discharged. If you default on your student loans, the Internal Revenue Service may intercept your tax refund. The government might also garnish your wages. This means that you will eventually pay the student loans in one way or the other if you earn any income for the year. Student loans can typically only be discharged if you become disabled or die.