Written By Kevin Payne
Updated on January 3, 2024
You’ve planned out paying for your college education. You’ve filled out a FAFSA form, applied for scholarships and grants, and took out student loans. You’re on your way to a college degree.
But something you may not have planned for is how student loans could affect you come tax time.
Are student loans taxable income? The answer is no, but that doesn’t mean they won’t have an effect on your taxes over your lifetime. The same goes for scholarships, grants and other methods of funding for a college education.
Let’s take a closer look at what you need to know about student loans and taxes.
Do student loans count as income?
The good news for borrowers is that your federal and private student loans don’t count as taxable income in the eyes of the IRS. Taxable income includes things like wages, bonuses, tips and investment income.
When you take out a student loan, you’ll end up paying it back, plus interest. You receive money to pay for school, but it’s not really yours because you’ll be paying it back.
What about scholarships, grants and work study?
If you received any scholarships or grants, those funds could count as taxable income, depending on how they are used.
Scholarships and grants are considered not taxable if they are used for education-related expenses, like tuition, fees, books, and other supplies and equipment required for your course work.
If your scholarship or grant funds were used for other expenses, however, they are considered taxable income and must be claimed on your tax return. Other expenses not tax-exempt include room and board and travel.
Work study money is typically considered taxable income. Although you’re not receiving funds to do whatever you want with, you are being compensated for services required as a condition for receiving these funds.
There are exceptions, however. You don’t have to claim these kinds of financial assistance on your taxes if you receive funds through these programs:
- The National Health Service Corps Scholarship Program
- The Armed Forces Health Professions Scholarship and Financial Assistance Program
Pay attention to any special funds you receive to pay for your college education. It’s important to stay on top of these matters or seek out help from a qualified tax professional.
When student loan forgiveness is and isn’t taxable
Taxes come into play if you’ve had any part of your student loan debt forgiven, too. Here’s what to be aware of when you’re filing your taxes.
Tax-free forgiveness
For people seeking loan forgiveness through Public Service Loan Forgiveness or Teacher Loan Forgiveness, you’re in luck.
Your forgiven debt, no matter how large, is entirely tax-free. This is great news if you’re a teacher or work in the public sector for a qualifying employer.
Taxable forgiveness
Forgiven student loan debt received after 20 to 25 years of qualifying payments on an Income-Driven Repayment plan is considered income. This type of plan will lead to a higher federal income tax bill.
Because this forgiven debt is considered taxable income, you need to prepare for a significant “tax bomb” down the road. The good news is that you have a couple of decades to plan and save for it.
Having your debt forgiven is a massive relief to most borrowers. Take time to research tax implications before pursuing a specific path to forgiveness.
How to get the student loan interest deduction
You could receive a tax break once you start paying back your student loans. The student loan interest deduction allows you to deduct up to $2,500 from your taxable income if you paid interest on your student loans.
You have to meet several conditions to qualify for this tax deduction. The biggest thing to know is that you only qualify for it for tax year 2019 if your modified adjusted gross income doesn’t exceed $85,000 if filing single or $170,000 if married filing jointly.
You can use our Student Loan Interest Deduction Calculator to determine whether you qualify for this tax deduction.
How to qualify for educational tax credits
You also could qualify for tax benefits because of your loans. The American Opportunity Credit or the Lifetime Learning Credit are both education-related tax credits. If you meet the requirements, the American Opportunity Credit can lead to a tax credit of up to $2,500 per year for your first four years of college.
The Lifetime Learning Credit also provides significant help, allowing you to claim up to $2,000 per tax return. Only one of these credits can be claimed in any given year. The Lifetime Learning Credit has no limit on the number of years it can be claimed.
If you qualify for either of these tax credits, make sure to include them when filing your taxes this year.
Do your tax homework ahead of time
Paying for college can be difficult enough without having to worry about tax implications. Taxes are part of life, though. Spend time learning how student loans can impact your taxes as well as the rest of your finances.
Like anything else in life, it’s best to plan ahead with taxes so you’re prepared for whatever may come your way. You don’t want to end up with a considerable tax bill without having a plan for how to pay for it.
If you’re not comfortable filing your own tax return, or if you have questions about your student loans, consult a qualified tax professional.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
