Student loans can open the door to educational opportunities you otherwise might not be able to afford. But once you have that hard-earned diploma in hand, those same student loans often become a source of stress.
The good news is that you may receive a tax break when you start paying off your student loans. If you’re still in school, there are also a few tax credits you can take advantage of.
Do student loans affect my tax returns?
If you’re still in school and receiving money from student loans, this is not considered taxable income, since you’re obligated to pay it back.
If you’ve graduated and are making payments on your student loans, you may be able to deduct some of the student loan interest you’ve paid. Whether or not you can take the student loan interest deduction will depend on your income and tax-filing status.
Are student loans tax deductible?
While the principal amount of your student loans is not tax deductible, the interest you pay on your student loans might be. Depending on your income and tax-filing status, you may be able to deduct up to $2,500 in student loan interest from your taxable income each year.
If you’re still attending school, you may also qualify for one of two different education tax credits: the American opportunity tax credit and the lifetime learning credit.
Tax deductions and credits for student loans
Whether you’re still in school or paying off educational debt, you may be able to receive tax benefits for the tax year 2021.
Student loan interest deduction
Taxpayers who pay interest on federal or private student loans may be able to take advantage of the student loan interest deduction. If you qualify for the deduction, you can reduce your taxable income by up to $2,500 per year.
The deduction, however, is set up so that the more income you earn, the less student loan interest you’re able to write off. Once your income reaches the limit set by the IRS, the deduction goes away altogether.
The income limits for the student loan interest deduction change each year. For the 2021 tax year, they are:
- Single, head of household and qualifying widow(er): The deduction starts to phase out when your modified adjusted gross income (MAGI) reaches $70,000. At $85,000, the deduction disappears completely.
- Married filing jointly: The deduction phaseout begins once your joint MAGI reaches $140,000. If your joint income surpasses $170,000, you can no longer claim the student loan interest deduction.
Note: You can’t claim the student loan interest deduction if your filing status is married filing separately. You have to file taxes jointly if you’re married and want to take this tax break.
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. Unlike with many other deductions, you don’t have to itemize your tax return to take advantage of the student loan interest deduction. Instead, you can claim the deduction as an exclusion from your income.
If you paid less than $600 in student loan interest, you can still deduct the amount on your taxes. You just won’t receive a 1098-E form and will have to manually calculate how much interest you paid.
Not sure whether you qualify for the deduction? The IRS provides an online form to help you figure out if you’re eligible. Even if you think that you might not qualify for the deduction, it’s worth finding out for sure. The student loan interest deduction could potentially save you hundreds of dollars on your tax obligation by lowering your tax bill or boosting your tax refund.
American opportunity tax credit
The American opportunity tax credit is worth up to $2,500 per student per year but can be claimed for only four total tax years per student.
The American opportunity tax credit has strict qualifying requirements, including:
- The student must be attending school at least half time for at least one academic term.
- The student must not have finished the first four years of a postsecondary program prior to the end of the tax year.
- The student must be pursuing a program that will end with a degree or other recognized credential.
The credit is phased out for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. Filers with MAGIs above those limits are not eligible.
Keep in mind that the American opportunity tax credit is a tax credit, 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. This might reduce your total tax bill by $250 to $550, depending on your tax bracket. A $2,500 tax credit, on the other hand, would reduce your tax bill by the entire $2,500 amount.
Lifetime learning credit
The lifetime learning credit, worth up to $2,000 per year per taxpayer, has less-strict requirements than the American opportunity tax credit.
Here are the criteria:
- There is no minimum requirement for how many hours you need to be enrolled to qualify.
- There is no limit to how many years the credit can be claimed.
- Students do not need to be pursuing a degree or other recognized education credential; in other words, students can use this credit for courses focused on acquiring job skills or continuing education.
Like the American opportunity tax credit, the lifetime learning credit is a tax credit rather than a deduction. The income limits and phaseouts are the same for the 2021 tax year: a limit of $90,000 for single filers and $180,000 for joint filers, with phaseouts beginning at $80,000 and $160,000 for single and joint filers.
5 other things to know about student loans and taxes
Taxes can be daunting. If you’re dealing with student loans during tax season, keep the following things in mind.
1. Dependents cannot deduct interest
If your parents can claim you as a dependent, you cannot deduct student loan interest from your overall tax bill. Your parents, however, might be eligible to claim the interest deduction if they are listed as a borrower or co-signer on your student loan.
If someone is helping you pay your student loans but they don’t list you as a dependent, you can still take advantage of the interest deduction. The payments they make on your behalf count as though you made them.
2. Don’t fear the marriage penalty
The marriage penalty is what happens when filing taxes jointly with a spouse results in a higher total tax bill than if the couple filed their taxes separately.
However, there aren’t any situations where being married filing separately would be beneficial while deducting student loan interest on taxes. In fact, married couples filing separately are not eligible for the student loan interest deduction.
3. Avoid default at all costs
Not only can defaulting on a student loan hurt your credit and cost you extra money, it also has other potential consequences. Your wages could be garnished and you could even have your tax refund withheld. While collection activities are on hold through May 1, 2022, for federal student loans, defaulted private student loans could result in a tax refund offset.
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 that will help you manage your monthly payments; you might be eligible for a hardship program, an income-driven repayment plan or a settlement.
4. Only some 529 funds can be used for student loan payments
According to the U.S. Securities and Exchange Commission (SEC), funds in 529 plans can be used on a 100 percent tax-free basis when put toward qualified educational expenses, such as tuition and fees or room and board. 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.
5. Your employer can help with student loans tax-free
If your employer offers tuition reimbursement through a student loan repayment assistance program, it can make up to $5,250 in tax-free payments toward your student loans each year. You will also not be subject to income tax on these payments. This incentive is currently in place through Dec. 31, 2025.
Resources for tax help with student loans
Navigating student loans on your taxes can be tricky. Thankfully, there are plenty of resources available to help guide you through the process.
Those who want direct help from the IRS can access the IRS Publication 970, titled “Tax Benefits for Education.” This publication outlines tuition reductions, how to claim credits, how the interest deduction works and more.
Those who feel unsure about filing their taxes themselves should reach out to a certified public accountant for help.