How Will Student Loans Affect My Taxes?

There are many benefits of claiming student loans on tax documents. Here, we outline what you need to know.

September 29, 2021

How Will Student Loans Affect My Taxes?

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Student loans can help students eliminate financial concerns while in school. Loans may cover tuition, textbooks, and living expenses. However, degree-seekers may have loan-related questions at tax time. Students generally do not claim loans as income on their taxes. However, learners can deduct loan interest to reduce their overall tax burden.

This guide offers an overview of student loans and taxes, including student loan tax credits, typical repayment plans, and student loan interest deductions. This page also covers tax-advantaged college savings accounts, such as the 529 plan, and various 529 tax benefits.

Do I Have to Report Student Loans on My Taxes?

Individuals do not have to report student loans as income as long as they use loan funds for school-related expenses. Grants, private loans, federal loans, and other state financial awards are excluded from taxable income. Loans are excluded even if they are your only source of income while in school. However, work-study income must be reported.

Can I Deduct Student Loan Interest?

Learners can claim up to $2,5000 in tax deductions on student loan interest each year. This interest can operate on both voluntary and required payment plans during the tax year. Lenders provide a 1098-E tax form to borrowers. The form documents the amount of interest paid. Students with loans from multiple lenders may receive multiple 1098-E forms. Learners should include all of the forms when filing taxes.

Tax Credit Programs

The federal government offers multiple student loan tax credits to help offset the cost of higher education. These credits reduce students' and families' overall tax burden. The government provides credits based on the amount spent on college.

529 Tax Benefits

A 529 savings plan can help families save money for college while receiving tax benefits. Many states offer 529 plan tax deductions or credits for contributions. These incentives help families save on annual taxes while contributing to their child's college fund.

Other 529 tax benefits include tax-deferred investment options and tax-free withdrawals. Families can invest 529 account funds to increase their child's college fund tax free. Withdrawals from a 529 account are not subject to taxes. However, the withdrawn funds must be used on education-related expenses, such as tuition, fees, and textbooks. Room and board may not be an approved use of 529 account funds.

Student Loan Repayment Plans

Borrowers can choose from several student loan repayment options. Some repayment plans feature income-based payments. This section highlights some of the most popular repayment options.

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