Student loans and taxes: Two subjects that few people enjoy thinking about; however, if you have student loans, they are likely to impact your tax bill. Here's what you need to know.
- Up to $2,500 of student loan interest can be tax-deductible.
- Depending on the loan forgiveness program, you might have to pay taxes on the amount forgiven.
- COVID-19 relief programs have temporarily impacted how some student loan benefits are treated by the Internal Revenue Service.
Student Loan Interest Tax Deduction
The student loan interest tax deduction is designed to reduce your taxable income, based on how much student loan interest you've paid during the year. It's important to note that you don't receive a deduction based on how much you've made in payments. Instead, you can only deduct your interest payments, up to $2,500.
The student loan interest tax deduction is an above-the-line deduction, meaning you don't have to itemize in order to claim it.
How to Qualify for the Student Loan Interest Tax Deduction
In order to qualify for the student loan interest deduction, you must meet the following criteria:
- Have paid interest on a qualified student loan, which is one used for education purposes for yourself, a dependent, or a spouse
- Be legally obligated to pay interest on the student loan
- Married filing separately is not your filing status
- Your modified adjusted gross income (MAGI) is below the threshold set by the Internal Revenue Service (IRS) each year
If you paid interest on your student loans, your loan servicer will send you a 1098-E if the interest you paid amounted to at least $600 during the year; however, even if you paid less than that amount, you can request a 1098-E from your lender or servicer. This document will tell exactly how much student loan interest you paid and how much you can deduct.
Deductions can reduce the amount of your income before you calculate the amount of tax you owe. Credits can reduce the amount of tax you owe dollar for dollar. A deduction reduces your taxable income, unlike a credit, which reduces the amount of tax you pay. The student loan interest deduction is not a dollar-for-dollar reduction of your tax bill.
Student Loan Forgiveness and Taxes
If you're eligible for student loan forgiveness, you might also be on the hook for taxes, depending on the situation. This can be an unpleasant surprise if your student debt is forgiven or is partially forgiven, and then you still need to pay a hefty tax bill.
Public Service Loan Forgiveness (PSLF)
Those who qualify for Public Service Loan Forgiveness (PSLF) don't have to worry about paying taxes on the amount forgiven. As long as you meet the eligibility requirements of working for a qualified employer and make 120 qualifying payments, you can have your loan balance(s) forgiven without a tax consequence.
Borrowers who have worked for eligible employers and have either FFEL, Perkins Loans, or Direct Loans, need to submit a PSLF application by Oct. 31, 2022, to take advantage of a limited PSLF waiver that gives borrowers credit for pay periods that would normally not count toward the 120 qualifying payments they need to receive loan forgiveness.
Income-Driven Repayment Forgiveness
Depending on the type of income-driven repayment plan, you might be eligible for loan forgiveness after 20 or 25 years. After being on an income-driven repayment plan for the required amount of time, the remaining balance is canceled; however, that cancellation ordinarily comes with a tax bill.
Even though forgiveness for income-driven repayment is normally considered taxable, the COVID-19 relief bill passed in 2021 eliminated taxes for this type of forgiveness through 2025.
As such, you could be on the hook for tens of thousands of dollars in taxes, depending on how much is ultimately forgiven.
Employer Student Loan Repayment Assistance and Taxes
Some employers offer benefits to their employees, helping them with their student loan payments. As with some types of student loan forgiveness, this form of aid is usually taxable. So if your employer offered up to $5,000 to help you repay your student loans during the year, it would be added to your taxable income. You would determine your taxes based on that total income.
However, as with income-driven repayment, COVID-19 relief has suspended the taxes on these amounts. Through 2025, if an employer offers student loan repayment assistance, you won't be taxed on the amount provided.
Congress could decide to make these tax provisions permanent, but it's important to take advantage of them now, if you can, just in case Congress chooses not to act and you end up on the hook for taxes down the line.
Do My Student Loans Affect My Tax Return?
Yes. If you paid student loan interest, you can receive a tax deduction for that amount, up to $2,500. Additionally, some types of loan forgiveness are considered taxable income.
Do Student Loans Count as Income on My Taxes?
Receiving a student loan to help pay for school isn't considered income for tax purposes. Debt isn't usually considered income by the Internal Revenue Service (IRS), although some types of debt forgiveness can be considered taxable income.
Does COVID-19 Relief Impact My Student Loans and Taxes?
COVID-19 relief has changed the way student loans affect your taxes, at least temporarily. Forgiveness related to income-driven repayment isn't considered taxable income through 2025. Additionally, as interest payments have been halted on federal student loans, you will likely be unable to take advantage of the student loan interest tax deduction.
The Bottom Line
Your student loans can have an impact on your tax return. If you have paid interest on your student loans, you might be able to deduct a portion of that interest from your taxable income.
Additionally, some types of loan forgiveness come with tax consequences. Review your financial circumstances and consider speaking with a tax professional to find out what the tax benefits and consequences are regarding your student loans.