Filing Taxes With Student Loans: The Comprehensive Guide

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Stanley Tate

#1 Student Loan Lawyer

Updated on December 21, 2022

How do student loans affect my tax return? Student loans don’t count as taxable income. You can’t deduct student loan payments from your taxes, but you can deduct student loan interest you pay from your tax return.

However, scholarship or fellowship money used on room and board, research, travel, or optional equipment does count as taxable income.

Here’s everything you need to know about repaying student loans, paying off interest, loan forgiveness, and your taxes.

Are student loans taxable?

No, student loans are not taxable income. Since you have to repay student loans, you do not have to pay taxes on loan amounts.

You also don’t have to pay taxes on loan forgiveness or up to $5,250 in repayment assistance received after March 27, 2020.

If you negotiate a private student loan settlement, any canceled debt may increase your tax bill.

You don’t have to pay taxes on your student loans because you’re supposed to eventually repay those loans. Before 2020, you had to pay taxes on loan forgiveness, but that changed (at least until 2025) as part of the American Rescue Plan Act.

Student loan interest deduction

Interest payments on federal or private student loans can be deducted from your taxable income (also known as a capitalized interest deduction).

For any interest paid over $600/year, your loan servicer or lender will send you a Form 1098-E. If you pay less than $600 in interest in a year, you can still deduct the amount of interest you paid but will not receive a 1098-E from your servicer. Check IRS Form 970 for more details.

This tax deduction applies to both federal and private student loans.

Related: Why Does Student Loan Interest Capitalize?

You qualify for at least some student loan interest deduction if your modified adjusted gross income (MAGI) is less than $85,000 ($170,000 for joint filers). You qualify for the full deduction if your income is under $70,000 ($140,000 if filing jointly).

A couple of things to note about the student loan interest deduction:

  • If your tax bracket is above the above totals, you won’t be able to deduct interest payments.

  • If you’re married, you probably can’t file separately and still qualify for this deduction.

  • If you’re a dependent, you can’t deduct paid interest.

  • You don’t get a tax deduction for paying someone else’s student loan interest unless they are a dependent. You must be legally obligated to pay the interest in order to claim this deduction.

Should you file jointly or separately?

Income-driven repayment (IDR) plans may be negatively impacted by filing jointly — although REPAYE plans do not distinguish between filing jointly or single. If you file jointly, the other 3 IDR plans determine income-driven monthly payments based on both spouses’ incomes.

If you want to benefit from PAYEIBR, or ICR repayment plans, filing separately should lower your monthly payment. However, filing separately may increase the cost of tax filing.

To figure out which option (IDR plan or filing jointly) is better for you:

  1. Calculate how much your monthly payment would be under the IDR plan of your choice.

  2. Calculate how much extra you would have to pay to file taxes separately (including extra tax preparation fees and lost tax credit opportunities, such as the adoption credit or earned income tax credit).

  3. Determine which option would save you more money in the long run.

Learn More: Marrying Someone With Student Loan Debt

Tax credits for higher education

If you paid for education expenses last tax year, you may be entitled to tax benefits for education. Choose either the American opportunity credit or the lifetime learning credit.

  • American opportunity tax credit (AOTC): This credit applies to a student’s first 4 years in higher education. AOTC covers 100% of the first $2,000 of qualifying education expenses, then 25% of the next $2,000 of qualified education expenses. To get the full credit, your modified adjusted gross income must be $80,000 or under ($160,000 with a joint filing status).

  • Lifetime learning credit (LLC): This credit may be claimed for any number of years. An eligible student who paid for qualifying education expenses while enrolled at least one academic term at an eligible higher education institute may qualify for LLC. The lifetime learning credit is worth up to $2,000/year.

Your school should send you 1098-T form (a tuition statement) to help you keep track of qualifying expense payments.

How to save tax-free money for college

Here’s how parents, guardians, grandparents, and even high school students can save tax-free money for college:

  • Coverdell ESA: If your modified adjusted gross income is under $110,000 ($220,000 if filing jointly), you can set aside up to $2,000/year for a beneficiary’s education expenses. This includes expenses at the elementary, secondary, college, or career school level.

  • QTPs/529 plans: A school or state may establish qualified tuition programs (QTPs) so you can prepay or save up to pay for qualifying education expenses. Sometimes called a 529 plan, this program lets you withdraw this money once in school without being taxed. Some states even allow 529 funds to be used to repay part of your student loans.

  • IRA withdrawals: Consider beefing up your traditional or Roth IRA for education expenses. You are allowed to withdraw from your IRA to help with education expenses for yourself, your child, your spouse, or even your grandchild. You still owe federal income tax on the amount withdrawn. However, you won’t be subject to the early withdrawal penalty.

  • Education Savings Bond Program: Usually, you pay tax on earned interest from savings bonds, either in the year it’s earned or in the year you cash in the bonds. However, cashing in qualifying bonds under an Education Savings Bond Program excludes the interest from your taxable income. The bond owner must be 24 years old or older when the bond gets purchased to qualify. Also, the bond money must be used exclusively for tuition-related expenses, not textbooks or room and board.

Will student loans take your tax refund?

Defaulted federal student loans may take part or all of your tax refund. If you have defaulted (not paid in 9 months) on your federal student loans, the federal government has the authority and ability to garnish your income tax refund.

The U.S. Department of Education may garnish your tax refund, up to 15% of your wages, or even your Social Security benefits — all without a lawsuit or legal judgment against you.

Defaulting on private student loans doesn’t usually affect your tax refund. A private collections agency would need to get a judge to allow them to garnish your wages or tax refund, and that doesn’t happen very often.

Receiving financial aid when you first borrow for school does not affect your tax refund.

Learn More: Student Loan Default: How to Get Federal Loans Out of it Fast

Do you have to pay taxes on loan forgiveness or repayment programs?

No, you no longer have to pay taxes on qualified student loan forgiveness (like Public Service Loan Forgiveness program) or most repayment assistance programs. Any loan forgiveness or repayment assistance received before March 27, 2020 does count as taxable income.

Any loan forgiveness or up to $5,250 repayment assistance you received from an employer student loan repayment program after March 27, 2020 does not count as taxable income, thanks to Congress passing the CARES Act in 2020 to combat the effects of the coronavirus pandemic.

Your employer might offer you student loan repayment assistance, which can contribute up to $5,250/year in tax-free repayment assistance. Up to $5,250 of repayment assistance is not taxable. This program is in place until Dec. 31, 2025.

Your student loan questions, answered.

I’m a student loan lawyer who loves to answer people’s student loan questions. Student loan borrowers should not have to be afraid of becoming taxpayers.

Schedule a call with me today. I have years of experience helping people like you figure out how their unique student loan situation will affect their federal tax return, taxable income, and tax refund.

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