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Home Student Loans Federal Student Loans Student Loans and Taxes: What You Need to Know
  • Contents
  • Tax Deductions for Student Loan Interest
  • Student Loan Forgiveness
  • Key Points to Remember When Filing Your Taxes

Student Loans and Taxes: What You Need to Know

Penny Redlin
By Penny Redlin
April 19, 2023
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If you have taken out a student loan to help cover the costs of your education, you will want to understand the potential impact it can take on your taxes. When it comes to tax season, many students are concerned about how their student loans will affect their tax filing.

Tax Deductions for Student Loan Interest

Deducting student loan interest can have a positive impact on your taxes. If your student loan payment included interest over the course of the tax year, you may be able to deduct up to $2,500 in interest on your taxes. This is known as the Student Loan Interest Deduction and is applicable for any student loan you may have.

Making payments on your student loans may make you eligible to deduct the interest you paid on the loan from your taxable income. This deduction allows you to reduce the amount of taxable income that you report to the IRS each year. This deduction is available to both full- and part-time students and you do not need to itemize your deductions to claim it, however, if you can be claimed as a dependent on someone else’s taxes, you likely won’t be able to claim this deduction.

For example, if you paid $1,000 in interest on your student loans last year, you could deduct that $1,000 from your taxable income. By reducing your taxable income, you could end up in a lower tax bracket which could then result in a lower tax rate and reduce your tax obligation—a lower tax bracket could potentially increase your refund or reduce your tax liability.

To ensure you qualify for student loan tax deductions, you must meet the following criteria:

  • The federal student loan or private student loan must have been borrowed by the taxpayer for the sole purpose to pay qualified higher educational expenses of the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.
  • Your modified adjusted gross income (MAGI) must fall within certain set limits.
  • For the most part, you will not be eligible to claim this deduction if it will result in a double benefit, or you did not make the payments which paid down the interest of your loan.

It’s also good to keep in mind that student loan interest deductions have certain limits and restrictions. If you earn too much money or file as married filing separately, you may not be eligible for this deduction.

Check with your tax professional to understand exactly how your individual situation, married or not, will impact your eligibility for deduction.

Student Loan Forgiveness

If you are able to receive student loan forgiveness, it means that you no longer have to pay back your loan, but there may be a catch when it comes to taxes. When it comes to paying federal taxes, through December 31, 2025, any amount discharged on a student loan will not be considered taxable income and will not be taxed. This taxable income exemption was part of the American Recue Plan Act of 2021. However, depending where you live, your state may require you to pay state income tax on any forgiven portions of your student loans. Some states that see student loan forgiveness amounts as income in the year they were forgiven.

This means that you may be charged income tax on that particular amount of money, even if you never physically received the money. This could increase your state’s determination of taxable income, thus impacting the amount of money you are required to pay for taxes that year.

For example, if you have $20,000 of student loans forgiven, you may owe taxes on that amount as if you received $20,000 of regular income and then increase the amount of taxes that you owe. It’s important to realize this can potentially be a significant tax burden, so you should plan ahead if you are anticipating having your student loans forgiven.

Public Service Loan Forgiveness (PSLF)

Remember how we just talked about the determination of federal taxable income and state taxable income? Well…same logic applies here. When it comes to federal taxable income, any amounts forgiven because of PSLF will never be considered federal taxable income. This will remain true even after 2025, because PSLF was written into law with this exemption. As long as you complete all the requirements, like working for an eligible employer and making 120 qualifying payments, any forgiven amount will not be considered federal taxable income.

However, depending on the state where you live, forgiven amounts, even under PSLF may be considered taxable income in your state.

Key Points to Remember When Filing Your Taxes

As you begin working to complete your taxes, here are a few points to keep in mind of how your student loans may impact your filing:

  • Double check how much total debt you owe to ensure there will not be discrepancies when you are reporting it on your tax documents.
  • Find how much interest you have paid on your loan this year so you can deduct it, if you are eligible.
  • If you have received forgiveness for your student loan this year, understand what implications that may mean on your taxes and contact your tax professional to ensure you are prepared for what may or may not be counted as taxable income .
  • Research federal tax credits such as The American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) as these are just some of the credits that could potentially lower your overall tax burden if utilized correctly.

Understanding how student loans can impact your taxes is vital when filing each year. Understanding the available deductions and credits can help you make smart financial decision and ensure you are not overpaying at tax time. If you have any questions regarding your particular situation, it is a good idea to consult a tax professional.

The information which is being provided is for general informational and educational purposes and is not, nor intended to be, legal, financial or tax advice. The publisher is not authorized to practice in front of the IRS and is not subject to IRS Circular 230. This information is general in nature and may not apply to the specific circumstances of individual readers. No claims are made about the accuracy, timeliness or usefulness of the content contained on this web site or any site linked to this site. Users of this site should seek specific guidance directly from a qualified legal, financial or tax professional. Nothing contained on or provided through this site is intended to be or is to be used as a substitute for professional advice.

 

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Edvisors (“Edvisors Network, Inc.”) provides independent advertising-supported platforms for consumers to search compare and apply for private student loans. Loan offers from participating lenders that appear on our websites are not affiliated with any college and/or universities, and there are no colleges and/or universities which endorse Edvisors’ products or services. Lender search results do not constitute an official college preferred lender list. Edvisors receives compensation from lenders that appear on this site. This compensation may impact the placement of where lenders appear on this site, for example, the order in which the lenders appear when included in a list. Not all lenders participate in our sites and lenders that do participate may not offer loans to every school.

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