I graduated from law school two years ago and work as a local government lawyer. My law school offers a loan repayment assistance program for graduates who earn below a certain income level. Twice a year, the law school cuts a check to me that assists me in making my loan repayments (their assistance can only be used for that purpose). The law school's assistance ends up covering probably 75% of the total amount of loan payments I make each year. To what extent I can take the full student loan interest deduction given the facts above? The law school does not pay my loans directly, I send payments each month to the various lenders and I remain the one legally obligated to make the payments.

ANSWER

The BIDaWIZ Team's Answer:

The short answer is that you can only deduct interest that is paid by you, not by the loan repayment assistance program. As per the Internal Revenue Code Section 108(f) and IRS publication 970, interest paid on student loans may be deductible, under certain conditions, only to the extent that interest is not paid by the LRAP loan. If it was deductible, then it would be a double tax benefit. In addition, while the IRS hasn't explicitly ruled on the deduction component of your question, they have ruled on the classification of a LRAP via revenue ruling 2008-34. The ruling specifically highlights how the LRAP received isn't considered income for purposes of individuals going into public office.