Your student loans may feel like one more obstacle to overcome when you’re working to file a complicated tax return. However, it’s important to be aware of the multiple ways in which a student loan tax deduction—or deductions—can earn you even more money back from the IRS this year.
Read on to learn how to determine your student loan tax deduction, as well as other ways to make sure you report your student loans correctly for the largest tax return.
How Do Student Loans Affect Your Taxes?
To avoid unpleasant fees and penalties, it’s essential to accurately report your financial status to the IRS come tax season. This includes money you received in the form of student loans, as well as scholarships and/or grants.
In addition to simply avoiding the potential consequences of filing incorrectly, there are also several benefits of correctly reporting student loan payments and other amounts on your tax returns. Below is a quick overview of how student loans—and other financial aid awards—impact your taxes.
Student Loans and Your Taxes: Quick Facts
- Student loans do not count as income.
You may rely on student loans as a form of financial support while you’re in college, but they don’t count as income since they must be paid back eventually.
If you list your student loans as income on your tax return, you will end up paying more taxes than you’re required.
Note: Financial aid-awarded work-study earnings must be reported as income.
- Education benefits can lower the amount you have to pay.
Education benefits—whether in the form of tax deductions or tax credits—can greatly lower the amount you owe in taxes for a given year.
Tax Credit: Directly reduces the amount you have to pay in income taxes by a dollar amount.
Tax Deduction: Reduces the amount of your income that is subject to tax, therefore reducing the amount you have to pay (IRS.gov).
These benefits are provided by the federal government, but they apply to both private and federal loans.
We’ll go over these deductions in more detail in the sections below, but they include the following:
- Tuition and fees deduction.
- Student loan interest deduction.
- Student loan tax credit.
- Scholarships and grants may be either taxable or tax-free.
Whether or not your scholarship or grant is taxable depends on which expenses you paid with your award and what type of education you’re pursuing.
(See our section about scholarships and grants below.)
- You could owe income taxes on a forgiven loan.
If you had one or more loans forgiven in the past year, you might owe taxes on the amount that was forgiven. The IRS counts this forgiven amount as income.
(See our section about forgiven loan taxability below.)
- You could have your tax refund garnished if you don’t pay your student loans.
This is called a “tax offset”, and if your loan is in default, it can mean you don’t receive a tax refund at all.
See our article on tax offset to learn more about this process and how to avoid it.
- Financial experts focused on Student Loan Debt Forgiveness
- Reduced payments based on your income
- US government programs designed to help reduce debt.
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Student Loan Tax Deductions and Credits
Tuition and Fees Deduction
If you paid more than $10,000 in tuition for the past year, you can deduct $4,000 from your taxable income when you file your taxes.
This can end up reducing your tax payment by around $1,000, depending on your tax bracket.
You may be able to deduct qualified expenses you paid for higher expenses during the year for yourself, your spouse or dependent.
You may not qualify for this student loan tax deduction if any of the following apply to your situation:
- Your filing status is married filing separately;
- Another person can claim you as a dependent to claim an exemption on their tax return;
- Your MAGI (modified adjusted gross income) is more than $80,000 if you’re filing separately or $160,000 if you’re filing jointly with your spouse;
- An education credit is being claimed for the qualified education expenses of the student; or
- You were a nonresident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes.
Student Loan Interest Deduction
The federal government offers a deduction for any amount you paid toward the interest of your student loans over the past calendar year.
The student loan interest deduction is non-itemized, which means you can claim it whether you choose to itemize your other deductions or go with the standard deduction.
The student loan interest deduction is reportable on Form 1040 in the AGI (adjusted gross income) category.
Loan servicers make reporting this amount on your taxes easy: they’re required to send you a Form 1098-E stating how much you paid in interest.
The student loan tax deduction for paid interest is limited to $2,500, and it’s also limited by your income. If your modified adjusted gross income (MAGI) is above the requisite range, your eligibility will be eliminated.
Learn all of the requirements and qualifications for the student loan interest deduction on IRS.gov.
Education Tax Credits
The government offers tax credits that can further decrease the amount you owe in taxes for a given year.
These include the American Opportunity Tax Credit and the Lifetime Learning Tax Credit.
- American Opportunity Tax Credit (AOTC)– This tax credit is for qualified education expenses in the first four years of college. You can earn an annual credit of up to $2,500 per eligible student.
- Lifetime Learning Tax Credit (LLC) – This credit is for qualified expenses in undergraduate, graduate or professional degree courses. You can claim up to $2,000 per tax return.
You can also use the IRS’s interactive tool to determine whether or not you’re eligible to claim an education credit.
How to Report Student Loans on Your Tax Return
Student loans aren’t counted as income on your taxes, and they aren’t taxable. The reason it’s important to ensure you report your student loan payments correctly on your taxes is to ensure you’re paying the correct amount (and no more than you need to).
Student Loan and Tuition Tax Forms
Half the battle of filing your taxes correctly is finding and interpreting the correct forms. If you have an employer, they will give you the necessary tax forms to report your income.
Similarly, if you’re making payments on one or more loans, your loan servicer(s) (the party or parties to whom you make loan payments) will provide you with the necessary forms to file your taxes.
You also need these forms in order to receive any education benefits for which you may be eligible.
As with the tax forms you receive from your employer, you’ll use the tax forms you receive from your college and/or loan servicer to fill out your tax return (1040).
- 1098-E – Student Loan Interest Statement
- If the interest you paid during the tax year met or exceeded $600, your loan servicer must provide a copy of your Student Loan Interest Statement (Form 1098-E).
- If you had multiple servicers for the tax year, you will receive a separate 1098-E form from each servicer.
- If you haven’t received a statement from your servicer, check with them via their website or over the phone.
- If you’re unsure who your loan servicer is, you can visit the National Student Loan Data System to find out.
- 1098-T — Tuition Statement
- Just as your loan servicer will send you a report showing how much you paid in interest over the past year, your college will send you this form, which shows how much you paid in tuition.
- If you haven’t received a 1098-T for this year, contact your school’s financial or administration office to make sure they have the correct address on file.
- Form 1098-T is essential in filing your taxes if you think you may qualify for a tuition deduction and other education benefits.
How to Claim a Student Loan Tax Deduction
When you have the above forms related to your educational expenses and loans, and you’re ready to fill out and submit your tax return, you’ll need additional forms to do so. Alternatively, you can opt to use an online tax service or the IRS website (E-File) itself.
Even so, it’s wise to know which forms that online service is essentially filling out and submitting on your behalf.
The most common types of income tax returns (where you’ll report any education deductions and credits) are the following:
- Form 1040 (U.S. Individual Income Tax Return) (“the long form”)
- Form 1040A (U.S. Individual Income Tax Return) (“the short form”)
- Form 1040EZ (Income Tax Return for Single and Joint Filers With No Dependents)
- Form 1040NR (U.S. Nonresident Alien Income Tax Return)
- Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents)
These different types of individual tax returns each have sections where you’ll report your adjusted gross income. This section is where you’ll be able to report student loan deductions with the information provided on your 1098-E and 1098-T.
Are Scholarships and Grants Taxable?
Money earned from scholarships, grants, and fellowships may be taxable or tax-free, depending on the expenses paid with the scholarship funds and whether you’re a degree candidate.
This includes scholarships—(amounts paid or allowed a student for the purpose of study) and grants/fellowships (an amount paid or allowed to the student for the purpose of study or research).
Grants also include need-based grants like Pell Grants and Fulbright grants.
All or part of your scholarship or fellowship may be tax-free if you meet the following conditions (IRS.gov):
- You’re a candidate for a degree at a qualifying educational institution;
- You use the scholarship or fellowship to pay for qualified expenses.
- Tuition and fees to attend the qualifying institution.
- Course-related expenses (books, supplies, and equipment that is required for enrollment or attendance).
Any portion of your scholarship or grant that went toward expenses other than the above “qualified expenses” is considered taxable and must be reported as part of your gross income.
That includes amounts you paid for the following, potentially education-related, expenses:
- Room and board.
- Equipment and supplies that aren’t required for enrollment or attendance.
- Clerical help
How to Report Scholarships on Your Taxes
You need to report any portion of scholarships, fellowships, and grants that do not meet the eligibility requirements for tax-free scholarships.
How you report this amount will depend on the type of return you’re filing:
- If filing a Form 1040, you’ll report the taxable amount on the “Wages, salaries, tips” line.
- If filing a Form 1049NR or 1040NR-EZ, you’ll report the taxable amount on the “Scholarship and fellowship grants” line.
Estimated Tax Payments for Scholarships
If any portion of your scholarship, grant or fellowship reward amount is taxable, you may be required to make estimated tax payments. The IRS has an interactive guide to determine whether or not this applies to you.
Are Forgiven Loans Taxable?
In short, the amount forgiven on a student loan is usually taxable as income.
An exception to this rule is if you qualify for tax-free debt forgiveness under one of the following circumstances:
- Public Service Loan Forgiveness, Teacher Loan Forgiveness, and other types of occupation-dependent forgiveness;
- Death and disability discharges;
- Closed school discharges;
- False Certification Discharge.
If you’ve had a loan forgiven over the past year, the amount that was forgiven will need to be reported as income on your tax return unless one of the above applies.
Final Thoughts: Student Loan Tax Deduction
Student loans and other types of financial aid—like scholarships and grants—can impact your taxes a little or a lot.
Depending on what you spent your financial aid on, how much you received, and where you are in the repayment process, filing your taxes could be fairly simple or more complex.
If you’re unsure of how to file your taxes, or you need assistance finding and filling out the correct forms, it may be wise to contact a tax professional.
It’s always best to make sure you file your taxes correctly, rather than deal with headaches and potential fees later on.