Qualified education loans include all federal student loans and many private student loans. The term qualified education loan is defined by the IRS in connection with the student loan interest deduction. The term also plays a role in determining whether a student loan can be discharged in bankruptcy.
Student Loan Interest Deduction for Qualified Education Loans
The definition of a qualified education loan was added to the Internal Revenue Code of 1986 at 26 USC 221(d) by the Taxpayer Relief Act of 1997 [P.L. 105-34], which established the student loan interest deduction for qualified education loans.
The student loan interest deduction allows borrowers to deduct up to $2,500 a year in interest paid on qualified education loans on their federal income tax returns. The student loan interest deduction is an above-the-line exclusion from income, so borrowers can claim the deduction even if they don’t itemize deductions on their federal income tax return.
Bankruptcy Discharge of Qualified Education Loans
The U.S. Bankruptcy Code at 11 USC 523(a)(8) provides an exception to the discharge of certain student loansunless the student loans would impose an undue hardship on the borrower and the borrower’s dependents.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 [P.L. 109-8] amended the U.S. Bankruptcy Code to add an exception to discharge for qualified education loans. After this change, private student loans no longer needed to be funded in whole or in part or guaranteed by a nonprofit institution to be excepted from bankruptcy discharge.
Definition of Qualified Education Loans
A qualified education loan is “indebtedness incurred by the taxpayer solely to pay for qualified higher education expenses.” [26 USC 221(d)(1)]
Mixed-use loans, which are used for other purposes in addition to qualified higher education expenses, are not considered to be qualified education loans because they were not incurred solely to pay for qualified higher education expenses. [26 CFR 1.221-1(e)(4) example 6] Thus, credit card debt and home equity loans and lines of credit are generally not considered to be qualified education loans.
A qualified education loan must have been borrowed to pay for the education of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents. The student must have been enrolled on at least a half-time basis and cannot have been simultaneously enrolled in elementary or secondary school. The student must have been seeking a degree, certificate or other recognized educational credential at an institution of higher education that was eligible for Title IV federal student aid or at a hospital or healthcare facility that provides postgraduate internship and residency training programs.
The qualified higher education expenses must have been paid or incurred within 90 days before or after the qualified education loan was borrowed. [26 CFR 1.221-1(e)(3)(ii)(B) and 26 CFR 1.221-2(f)(3)(ii)(B)]
Qualified education loans may also include loans that are used to refinance qualified education loans.
Definition of Qualified Higher Education Expenses
Qualified higher education expenses are limited to the college’s cost of attendance as defined in the Higher Education Act of 1965 as of August 4, 1997. This includes tuition and required fees, and allowances for room and board, books, supplies and equipment, transportation, miscellaneous personal expenses, dependent care costs, study abroad costs, disability-related expenses and loan fees.
The date limitation excludes subsequent changes to the statutory definition of the cost of attendance, such as rental or purchase of a personal computer, room and board for students who are enrolled less than half-time, and the one-time cost of obtaining professional licensure or certification.
The cost of attendance is determined by the college financial aid office, not the borrower or lender.
The total amount of qualified higher educational expenses may be reduced by the higher education expenses used to justify certain tax-free education benefits, such as tax-free interest on education savings bonds, the American Opportunity Tax Credit and Lifetime Learning Tax Credit, employer-paid educational assistance, veterans educational assistance, tax-free scholarships and fellowships, and tax-free distributions from college savings plans (e.g., 529 plans, prepaid tuition plans and Coverdell education savings accounts).
Examples of Qualified Education Loans
Qualified education loans include all federal education loans, such as Federal Stafford loans, Federal Perkins loans, Federal PLUS loans and Federal Consolidation loans. Qualified education loans also include many private student loans, but not all private student loans.
In particular, these private student loans, among others, are not considered to be qualified education loans:
- Private student loans that exceed the college’s cost of attendance, either on their own or in combination with other financial aid
- Private student loans that are used to pay for college costs at a college that was not a Title IV institution at the time the loan was borrowed
- Private student loans that are used to pay for prior-year balances
- Loans obtained from a relative, such as a spouse, brothers and sisters (including half brothers and sisters), parents, grandparents, children, grandchildren, ancestors and descendants
- Loans from qualified retirement plans, such as 401(k) loans
- K-12 loans
- Continuing education loans
- Bar study loans
- Residency and relocation loans
Non-education debt, such as credit card debt, auto loans and mortgages are also not considered to be qualified education loans.
