You should receive Form 1098-E, showing the amount of interest you paid on the student loan. You can include as interest: loan origination fees, capitalized interest (unpaid interest added to the outstanding principal balance), interest on revolving lines of credit, interest on refinanced student loans, and voluntary interest payments.
The maximum benefit is a $2,500 reduction of your taxable income. The amount of the deduction you will be able to claim will depend on your income level. There is a phase-out of the deduction above a certain level of modified adjusted gross income, which is adjusted gross income before taking into account the student loan interest deduction. If the limitation applies, you can use the worksheet in the instructions for Form 1040, or in IRS Publication 970, Tax Benefits for Education, to figure your deduction.
You will have to reduce your interest expense deduction if you paid any of the educational expenses with the following tax-free benefits:
Employer-provided educational assistance benefits that are not included in box 1 of your W-2 as taxable compensation.
U.S. savings bond interest that you exclude from income because it is used to pay qualified education expenses.
Tax-free distributions from qualified state tuition programs.
Tax-free distributions from Coverdell education savings accounts.
Veteran’s educational assistance
The tax-free part of scholarships and fellowships
Any other tax-free payments received as educational assistance (except for gifts and inheritances)