Up to $2,500 a year in student loan interest is deductible as an above-the-line exclusion from income. You can take this deduction even if you do not itemize. Capitalized interest and origination fees are included.

For the interest to be deductible the following criteria must be satisfied:

1. The interest has to have been a legal obligation of the taxpayer. Repayment assistance received from a third party is counted as though the payments were made by the taxpayer. If a friend helps the taxpayer make the payments on the taxpayer's student loans, the taxpayer gets the deduction, not the friend.
2. The taxpayer must not be claimable as an exemption on another taxpayer's income tax return. Even if a dependent student's parents voluntarily do not claim him as an exemption on their income tax returns, he is still not eligible for the student loan interest deduction.
3. The loan must be a qualified education loan, which is defined as a loan used solely to pay for qualified higher education expenses (a mixed-use loan such as credit card debt does not qualify) on behalf of the taxpayer, the taxpayer's spouse or the taxpayer's dependent at a college or university that is eligible for federal student aid within a reasonable period of time before or after the loan was originated. (Typically, a reasonable period of time is defined as occuring within 90 days of the semester. Federal education loans are also automatically qualified.) A loan used to refinance a qualified education loan, such as a consolidation loan, also qualifies, provided that it is used exclusively to refinance qualified education loans. The debt must not be owed to a relative, so peer-to-peer education loans from a family member do not qualify. 401(k) loans do not qualify even if they are used solely for qualified higher education expenses.
4. The student must have been enrolled at least half-time in a degree or certificate program when the qualified education loan was incurred. 
5. Qualified higher education expenses are limited to the official cost of attendance as published in the school's student budget. Qualified higher education expenses are reduced by certain other expenses, such as scholarships, veteran educational assistance, employer tuition assistance, and distributions from 529 plans, prepaid tuition plans and Coverdell education savings accounts.

There is no double-dipping.

The 2008 income phaseout runs from $55,000 to $70,000 for single filers and $115,000 to $145,000 for married filing jointly. Married taxpayers who file separate returns are not eligible.