How Student Loans Impact Your Taxes

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Whether you’re still in college or you’ve already graduated, you may be eligible for tax deductions and credits if you have paid for higher education expenses or used student loans to help foot the bill. Such education tax benefits include the student loan interest deduction, the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC).

Note that you do not need to pay taxes on funds received through a student loan since this money is not considered taxable income. Get an overview of how student loans can impact your taxes during school, after you graduate and for years to come.

Eligibility for student loan interest deduction

The student loan interest deduction lets eligible taxpayers deduct up to $2,500 in student loan interest from their taxable income each year. With this deduction, the IRS focuses on the interest you paid to your lender. The actual loan payment itself isn’t deductible – only the interest you’ve paid off is.

You can deduct either $2,500 or the full amount of student loan interest you paid in the tax year, whichever is less. This deduction can also apply for either federal or private student loans, and it phases out when you reach certain income levels.

For the 2024 tax year, income rules and thresholds are as follows:

• Single, head of household and qualifying surviving spouse: The deduction starts to phase out when your modified adjusted gross income (MAGI) reaches $80,000. At $95,000, the deduction disappears completely.
• Married filing jointly: The deduction phaseout begins once your joint MAGI reaches $165,000. If your joint income surpasses $195,000, you can no longer claim the student loan interest deduction.

How to claim the deduction

To claim the student loan interest tax deduction, you’ll take the following steps:

• Step 1: Consider your MAGI for the tax year. Confirm you earned below the threshold to qualify for the student loan interest deduction or a partial deduction.
• Step 2: Figure out how much student loan interest you paid during the tax year. When you pay at least $600 in qualified student loan interest, your lender should send you an IRS Form 1098-E (Student Loan Interest Statement). You can use this form to claim the student loan interest deduction when filing your taxes.
• Step 3: Claim the maximum deduction you’re eligible for. Claim the deduction on your income tax returns (Form 1040). Unlike many other tax deductions, you don’t have to itemize your tax return to take advantage of the student loan interest deduction.

2 Ways to get a student loan tax credit

There are additional student loan tax benefits you can qualify for, including the American opportunity tax credit and the lifetime learning credit.

American opportunity tax credit (AOTC)

The AOTC is worth up to $2,500 per student per year, although it can be claimed for only four total tax years per student. Up to 100 percent credit is available for the first $2,000 worth of qualified education expenses annually. After that, a 25 percent credit is available for the next $2,000 of qualified education expenses each year.

The credit is gradually reduced for filers with the following MAGI (filers with MAGIs above these limits are not eligible):

• Single filers: Between $80,000 and $90,000
• Joint filers: Between $160,000 and $180,000

The American opportunity tax credit is not a tax deduction. Although the two terms sound similar, the difference is significant. A $2,500 tax deduction simply reduces your taxable income by $2,500, but a $2,500 tax credit would reduce your tax bill by the entire amount.

Lifetime learning credit

The lifetime learning credit is worth up to 20 percent of the first $10,000 in eligible education expenses – or up to $2,000 – per year. In addition, it has more lenient requirements than the American opportunity tax credit.

Like the American opportunity tax credit, the lifetime learning credit is a tax credit rather than a deduction. The income limits and phaseouts are also the same – a limit of $90,000 for single filers and $180,000 for joint filers applies with phaseouts beginning at $80,000 and $160,000 for single and joint filers, respectively.

You can’t apply both the American opportunity tax credit and the lifetime learning credit to the same education expenses. Generally, you’ll need to choose one or the other in any given tax year.

Resources for tax help and student loans

Navigating student loans on your taxes can be tricky, but you should now feel more informed as you move forward. You don’t have to stop here, either. There are plenty of other resources available to help guide you through the process.

• IRS tax credit comparison chart: If you’re still in school, you can use this handy chart to explore the American opportunity tax credit and the lifetime learning credit to find which best suits you.
• IRS Publication 970: This publication outlines tuition reductions, how to claim credits, how the interest deduction works and more.
• Other tax resources: If you feel unsure about filing your taxes yourself or which deductions or credits might apply to you, you can always contact a certified public accountant or explore other tax resources for help.

Bottom line

Having to borrow money for college may not be ideal, but you can at least save some money when you file your taxes if you paid student loan interest and meet other eligibility requirements. There are also tax credits that can apply if you paid for higher education expenses in a tax year, though income requirements apply.

Since each of these programs works differently and may or may not apply in your situation, you should arm yourself with information and take steps to reduce the amount of money you borrow and have to pay back.

Frequently asked questions

• How does student loan forgiveness affect your taxes?
  

  If your student loan debt is forgiven entirely, or even a portion is forgiven, you could be on the hook for an unexpected tax bill. Similar to other debts canceled by a creditor, the IRS considers forgiven student loan debt taxable income. The amount of debt that is forgiven becomes part of your gross income for the year and is subject to income taxes.

  There are some exceptions. Student loan debt is not considered taxable income if it is eliminated through programs like the Public Service Loan Forgiveness. If your debt has been forgiven, speak with a tax professional to determine how your forgiven balances will be treated.

• How do 529 funds affect your taxes?
  

  According to the U.S. Securities and Exchange Commission (SEC), money in 529 plans can be used on a 100 percent tax-free basis when put toward qualified educational expenses. These expenses can include (but are not entirely limited to):

  • Tuition and fees
  • Room and board
  • Books and supplies
  • Computers and related equipment

  In most states, you can also use up to $10,000 in student loan payments from your 529 without incurring a penalty or having to pay taxes. These funds can be applied toward both federal and private student loans.

• What happens to your tax refund if you default on student loans?
  

  Defaulting on a student loan can hurt your credit score and cost you extra money. Your wages could be garnished and you could even have your tax refund withheld.

  If you’re at risk of defaulting, take steps to set up a repayment plan or enroll in a forbearance program. Consider calling your loan servicer to create a plan to help you manage your monthly payments. You might be eligible for a hardship program, an income-driven repayment plan or a settlement.