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
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:
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.
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