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Filing your taxes is never fun. There are so many deductions, forms, and rules that make it tough to know if you’re forgetting anything.
But if you have federal or private student loans, you’re going to want to pay attention to a few things that can potentially make a big difference to your final tax bill.
We’ll go through the student loan interest tax deduction, student loan repayment programs, and how your filing status can affect your taxes. Plus, we cover some current student tax breaks you’ll want to take advantage of if they apply to you.
Is Student Loan Interest Deductible?
One of the main ways that the government tries to help ease the mounting burden of student loans is to offer a student loan deduction. This deduction reduces your taxable income by the amount of student loan interest that you pay during the year, up to $2,500.
It’s a deduction only for the paid interest — not the total student loan payments you made for your higher education debt.
Because the deduction is a reduction in taxable income, you can claim it without needing to itemize deductions on your tax return.
Who qualifies for a student loan interest deduction?
Not all student loan interest payments will qualify for the deduction. The interest that you pay on your student loan needs to be for a qualified student loan: a loan that you took out for yourself, your spouse, or your dependent to cover qualified education expenses. These qualified education expenses include necessary expenses like tuition, books, room, and board during the academic period.
In addition to this, the IRS has a few more criteria that you need to meet in order to take the deduction:
- You must be legally obligated to pay the student loan interest. If you took out the loan for your child and are legally required to repay it, you qualify for the deduction.
- You (or your spouse if married) can’t be claimed as a dependent on someone else’s tax return
- If you are married, you and your spouse can’t file your taxes separately
- Your modified adjusted gross income (MAGI) must be under the maximum income threshold of $85,000 ($170,000 if married filing jointly)
If your MAGI is below $70,000 ($140,000 if married filing jointly) you’ll be able to take the full deduction for your student loan interest paid, up to $2,500. If your MAGI is between $70,000 and $85,000 (or $140,000 and $170,000 when filing jointly), you can take a reduced deduction. If your MAGI is above the income limits, you can’t take any deduction.
How much can the student loan interest deduction save you?
The student loan interest deduction is an “above the line” deduction, meaning it reduces your taxable income. If you are in the 22% tax bracket and you are able to take the full $2,500 tax deduction, it could save you $550 in taxes.
How do you claim the student loan interest deduction?
You claim this deduction when filing your taxes for the year. If you paid more than $600 in student loan interest during the year, your loan servicer is required to send you tax form 1098-E, which shows you exactly how much you paid in student loan interest during the year.
If you paid less than $600, you can still claim the deduction. Ask your loan servicer for a 1098-E or log into your loan account to get the total amount of interest paid.
Once you know how much you paid in interest, you can use the student loan deduction worksheet included in the instructions for the IRS Tax Form 1040. The worksheet will walk you through calculating your deduction. Once you know your deduction amount, you’ll enter it on your form 1040 Schedule 1.
If you use a tax preparation service, their questionnaire should ask you if you’ve paid student loan interest during the year. Be sure to answer yes and provide the amount of interest paid — they’ll take care of calculating the rest.
Student Loan Repayment Programs and Taxes
The student loan interest deduction isn’t the only way student loans can impact you come tax time. There are two student loan repayment programs that may have an impact on how much you pay in taxes.
Student loan forgiveness
If you receive student loan forgiveness, there’s a chance it could be considered taxable income, leaving you with a tax bill at the end.
In general, the IRS taxes the benefit you receive from the cancellation of debt (any debt, not just student loan debt). But there are some exceptions to this.
If your loan balance is forgiven after you’ve worked for a certain period of time for a certain employer, the forgiveness isn’t considered taxable income. That’s great news for people participating in the Public Service Loan Forgiveness Program.
But the tax treatment is different for loans forgiven at the end of an income-driven repayment plan. If your remaining loan balance is forgiven after you’ve been on an income-driven repayment plan for 20 or 25 years, that forgiven balance will generally be considered taxable income. If the remaining amount forgiven is $25,000, the IRS will expect you to pay taxes on that amount.
Employer student loan repayment assistance
Employers are recognizing that their employees are struggling under the weight of student loans. According to the Society of Human Resource Management, a growing number of them are offering student loan repayment assistance programs. These programs may offer a matching contribution or a flat contribution to loans, to help employees pay off their debt.
While this is a great benefit, the downside is that the amount your employer repays is considered taxable income to you. If your employer paid $3,000 towards your student loan and you’re in the 22% tax bracket, you could end up owing an additional $660 in taxes.
There is proposed legislation to have up to $5,250 of employer repayment assistance excluded from taxable income, but for now, you’ll need to pay taxes on anything that your employer pays.
One final thing to note when it comes to student loans and taxes, is that your tax filing status matters. Borrowers who are married but choose to file separately on a given tax year are disqualified from taking the student loan interest tax deduction.
But on the other hand, married borrowers who are opting for an income-driven repayment plan may want to file separately. If they file a joint return, the monthly income payment is based on their combined discretionary income. If they file separately, in most situations the monthly payment is just based on the borrower’s income.
Deciding whether to file jointly or separately comes down to a number of decisions that you need to make for your financial situation. But if you have student loans, you’ll want to consider the impact of them in your decision.
Current Student Tax Breaks You’ll Want to Know About
If you’re a current student, there are some tax breaks you’ll want to take advantage of:
American Opportunity tax credit
If you’re a student working on your degree and you haven’t completed four years of post-secondary education yet, you could be eligible for the American Opportunity Tax Credit (AOTC). This credit — worth $2,500 — is available to students (or parents of students) who:
- Are in school at least half time
- Pay for qualified education expenses
- Have a MAGI of less than $90,000 (or $180,000 if married and filing jointly)
- Aren’t claimed as a dependent on someone else’s tax return
A tax credit is valuable — it directly reduces the amount of tax you have to pay. If your tax bill is $5,000, qualifying for the AOTC will reduce your tax bill to $2,500.
Lifetime Learning tax credit
Another valuable tax credit for eligible students is the Lifetime Learning Tax Credit (LLTC). This $2,000 tax credit is a little more flexible than the AOTC. You don’t need to be pursuing a degree, and you don’t need to use it within your first four years of post-secondary education (in grad school? You can use this).
But there are some restrictions. You MAGI needs to be less than $67,000 (or $134,000 if married filing jointly). And you can’t be claimed as a dependent on someone else’s tax return.
You can compare the two tax credits with this chart from the IRS.
Student loans may be the last thing on your mind when April 15th rolls around. But you’ll want to take time to understand deduction options and tax impacts so you’re well prepared.