Up to $2,500 a year in interest on some student loans (Stafford, PLUS, Perkins, consolidation, and private) may be tax-deductible, if certain criteria, such as income limits, are met. The proceeds of the loan must have been used for qualified higher education expenses (tuition, fees, room and board, supplies, and other related expenses), and you must have been enrolled at least half-time in a qualified program at an eligible institution.

After 2002, the rule that you could only deduct interest for the first sixty months of your loan has been eliminated. You can now deduct interest no matter how long you've had the loan. Also beginning in 2002, the income limits have been increased. For 2006, deductibility phased out if your income was between $50,000 and $65,000 for single taxpayers and $105,000 and $135,000 for couples filing jointly. These limits are increased from time to time to adjust for inflation, so see IRS Publication 970 for up-to-date limits.

If you paid more than $600 in interest on your student loans during the year, your lender will send you a Form 1098-E showing the amount paid. To claim the amount on your income taxes, you must file Form 1040 or 1040A, but unlike the mortgage interest deduction, you don't have to itemize in order to get the deduction. If you're married, you have to file jointly.