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I take it to understand that her Loan payments are a deductible Educational Expense, Correct?
No her student loan INTEREST is deductible, (the repayment of money that she was loaned and had the use of, is never deductible ... in ANY situation)But, again her COST for borrowing that money (the interest) IS deductible. (for the same policy reasons that mortgage interest is deductible... the interest is the cost of borrowing)
See this from IRS:Topic 456 - Student Loan Interest Deduction
You may be able to deduct interest you pay on a qualified student loan. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid.
The deduction is claimed as an adjustment to income so you do not need to itemize your deductions onForm 1040, Schedule A(PDF).
And finally, as the previous expert mentioned, the 10% penalty for pulling tax advantaged retirement money from an IRA IS waived for qualified educational expenses (which this is), but if this was pre-tax money that was used to create the IRA, the dollars that come out will be added to her taxable income for the year (as they have never been taxed.
Here's the link to the IRS guidance regarding the student loan interest:
Hope this helps
This seems to make more sense. Thank you.