How Do Student Loans Impact My Taxes?

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.

• The American Opportunity Tax Credit

  The American Opportunity Tax Credit supports undergraduate students who do not hold a college degree. The credit provides up to $2,500 for educational expenses, such as tuition, administrative fees, and course materials. Learners must be enrolled at least half time.

• The Lifetime Learning Credit

  The Lifetime Learning Credit awards up to $2,000. Unlike the American Opportunity Tax Credit, this credit is available to learners with any education level and course load. The federal government awards the Lifetime Learning Credit to graduate students and learners taking classes for job training and professional development.

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.

• Standard Repayment Plan

  Borrowers with any type of loan can choose the Standard Repayment Plan. Borrowers with this plan pay a fixed amount each month for 10 years. Individuals with this plan may receive higher annual tax deductions, since monthly payments are higher than with some other plans.

• Graduated Repayment Plan

  The Graduated Repayment Plan features lower monthly payments that increase over time, typically every two years. Borrowers with this 10-year plan usually receive lower tax deductions at first, since annual payments are lower initially.

• Extended Repayment Plan

  Borrowers with more than $30,000 in federal loans can choose the Extended Repayment Plan. Individuals with this plan make lower monthly payments over a longer period of time. This plan provides a 25-year repayment period. The lower monthly payments result in lower annual tax deductions.

• Revised Pay As You Earn Repayment Plan (REPAYE)

  The REPAYE Plan features monthly payments equal to 10% of the borrower's discretionary income. The payment is recalculated each year based on the borrower's income and family size. After 20 years of regular payments, the government forgives the remaining loan balance. Loans used for graduate studies require 25 years of payments. Individuals may pay taxes on the forgiven balance.

• Pay As You Earn Repayment Plan (PAYE)

  The PAYE Plan requires borrowers to pay 10% of their discretionary income each month. However, individuals never pay more per month than they would under the Standard Repayment Plan. The government forgives remaining student loan debt after 20 years of payments. Borrowers may pay taxes on their forgiven student loan balance.

• Income-Based Repayment Plan (IBR)

  This type of plan features payment amounts based on the borrower's income level. Monthly payments equal 10% or 15% of the individual's discretionary income. After 20-25 years of payments, the federal government forgives the remaining student loan balance. Borrowers may need to pay taxes on the forgiven student loan balance.

• Income-Contingent Repayment Plan (ICR)

  Borrowers with the ICR Plan may pay 20% of their discretionary income each month. They may also pay the amount they would with a 12-year fixed-rate repayment plan, whichever is lower. After 25 years, the government forgives the remaining loan balance. As with other plans, borrowers may need to pay taxes the forgiven amount.