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When tax season rolls around, those who received student loans, scholarships or repayment assistance may have questions about how that money impacts their taxes. Here are answers to key questions related to student loans and taxes.
Paying for college is no easy feat these days. With tuition costs continuing to rise many students have no choice but to take out loans to finance their education. But navigating the world of student loans can be confusing especially when it comes to how they interact with your taxes.
In this comprehensive guide, we’ll tackle some of the most common questions surrounding student loans and taxes:
- Are student loans considered taxable income?
- What about student loan forgiveness – is that taxable?
- Can you deduct student loan interest on your taxes?
- Do employer-paid student loans count as taxable income?
Let’s break down each of these key questions to gain clarity on the tax implications of your student loans.
Are Student Loans Taxable Income?
This is one of the most frequent questions borrowed students have about their loans. Fortunately, the answer is relatively straightforward:
No, student loans are not considered taxable income under the Internal Revenue Code.
The reason for this is that student loans are treated as borrowed money that you must pay back, rather than funds you’ve earned. The IRS does not classify student loans as taxable income on your tax return.
Some key points on why student loans don’t count as income:
- They are not classified as earned income, wages, or salaries.
- You have an obligation to repay the loan funds (with interest) to the lender.
- The loan proceeds can be used for education-related expenses like tuition, books, supplies, as well as living expenses.
However, it is important to note that if you use any part of the loans for non-qualified expenses, those amounts could be taxable. For example, if you use a portion of the loans for things like vacations, automobile expenses, etc. those amounts might be considered taxable income by the IRS.
Is Student Loan Forgiveness Considered Taxable Income?
Student loan forgiveness programs provide much-needed relief to borrowers struggling with education debt. But a common concern is whether the forgiven loan amount will count as taxable income.
The general rule is that student loan amounts forgiven or cancelled by lenders are subject to income tax under the IRS tax code. Some exceptions do exist such as for Public Service Loan Forgiveness (PSLF) but most balances discharged through forgiveness plans will result in a tax bill.
For example, if you have $50,000 of loans forgiven under an Income-Driven Repayment (IDR) plan, you would have to claim that $50,000 as taxable income when filing your tax return for the year the forgiveness occurred.
There have been ongoing efforts to change this tax treatment of forgiven student loans, but for now, borrowers claiming forgiveness should be prepared for the potential tax hit. Proper planning and budgeting can help offset the impact.
Currently, student loan discharges for reasons like total disability or death of the borrower are not taxable. And loans forgiven under PSLF are also exempt from federal taxation through 2025. But apart from these specific cases, you can expect to owe taxes on any forgiven balances.
Can You Deduct Student Loan Interest on Your Taxes?
Taking out a deduction for student loan interest paid is one way borrowers can potentially lower their tax bill each year.
The Student Loan Interest Deduction allows you to deduct up to $2,500 of interest paid toward qualified student loans annually. This deduction applies to both federal and private student loans.
To claim the deduction, the loans must have been used to pay qualified higher education expenses like tuition, room and board, books, fees, etc. for yourself, spouse, or dependents.
The deduction can provide substantial tax savings, but there are some income phase-out limits to be aware of:
- For single filers, the deduction phases out between $70,000 and $85,000 of income
- For married filing jointly, it phases out between $145,000 – $175,000 of income
So higher income borrowers may not be eligible. The interest deduction is taken as an adjustment to income, so it can be claimed even if you don’t itemize deductions. Keeping track of student loan interest paid each year is key to claiming this deduction.
Do Employer-Paid Student Loans Count as Taxable Income?
Some employers are now offering student loan repayment assistance as an employee benefit. But an important question surrounding these programs is whether the employer contributions will count as taxable income.
The good news is, under current tax law, employer-paid student loan assistance does not count as taxable income up to an annual limit.
Specifically, employers can contribute up to $5,250 per employee per year toward student loan repayment on a tax-free basis. Any amount above that would be considered taxable income.
This tax benefit is scheduled to expire after December 31, 2025 unless extended by Congress. So take advantage of it while you can if your employer provides this assistance.
While not taxable, the employer payments toward your loans are subject to standard payroll tax withholding, including Social Security and Medicare taxes. So no extra income tax, but normal payroll taxes will apply.
Key Takeaways
- Student loans themselves are not considered taxable income. You do not have to claim loan amounts as income when filing your tax return.
- Loan forgiveness will generally create a tax bill, except for programs like PSLF. Be sure to plan for the tax impact of any forgiven balances.
- You can deduct up to $2,500 in student loan interest paid per year, providing tax savings.
- Employer-provided student loan repayment assistance is tax-free up to $5,250 annually, until 2025.
Understanding these key points on how student loans interact with your taxes can help you maximize savings as a borrower. Consult with a tax professional if you need assistance tackling student loan questions specific to your situation.
Can I deduct student loan interest?
If you repaid student loans last year, you may be eligible for the student loan interest deduction. Here’s how to claim the deduction:
- Get a student loan interest statement. If your interest payment was over $600, your student loan servicer will automatically send you Form 1098-E, a student loan interest statement.
- Contact your servicer if you paid less than $600. You can still deduct interest if you paid less than $600. Youll just need to ask your servicer or access your online account to get the exact amount.
- Calculate your deduction. Use the IRS’s student loan deduction worksheet to calculate your deduction. You’ll need this amount to complete your tax paperwork.
Do student loans or scholarships count as income?
Student loan money you receive for college is not taxable because you’ll eventually repay the loan.
Free money used for school is treated differently. You don’t pay taxes on scholarship or fellowship money used toward tuition, fees and equipment or books required for coursework. If your entire scholarship is nontaxable, you don’t have to report it on your return.
But any portion of those funds used for room and board, travel or optional expenses is taxable, as is any money received for teaching, conducting research or other services related to the scholarship. You’ll want to report any taxable amount of the rewarded money as part of your gross income.
If you benefitted from an employer student loan repayment program, up to $5,250 is considered nontaxable, and any amount over that must be reported as income.
Are Student Loans Considered Taxable Income?
FAQ
Do I have to report my student loans on my tax return?
If you made federal student loan payments in 2024, you may be eligible to deduct a portion of the interest you paid on your 2024 federal tax return. Student loan interest payments are reported both to the Internal Revenue Service (IRS) and to you on IRS Form 1098-E, Student Loan Interest Statement.
Are student loans considered income?
If you’re in a hurry and want a short answer, no, student loans themselves are not taxable. This is because student loans are essentially loans that one is expected to pay back to the lender with interest. So, since it’s not an earned income, they shouldn’t trigger a higher tax bill.
Do student loans count as proof of income?
Can I Use Student Loans as My Proof of Income? For full time students applying with a qualified co-signer, student loans can often suffice as proof of income on the rental application.
Is a student loan charge off taxable income?
When a creditor cancels, forgives, or discharges a debt, they erase some or all of the amount from your outstanding balance. The amount forgiven is typically includable in your gross income and subject to income taxes unless a tax law specifically exclude it from taxable income.
Do student loans affect your tax return?
If you have student loans, don’t forget about them at tax time. Student loans can impact your federal income tax return in several ways, from reducing your taxable income to losing your refund, depending on your situation. Here’s what you need to know. 1. You May Qualify for the Student Loan Interest Deduction
Are student loans tax deductible?
Understanding how these loans interact with tax obligations and eligibility for government benefits is critical for borrowers managing fiscal responsibilities. Student loans are not considered taxable income under the Internal Revenue Code, meaning borrowers do not report them as income on tax returns.
Are student loans taxable income?
Student loans are not considered taxable income under the Internal Revenue Code, meaning borrowers do not report them as income on tax returns. The IRS treats these loans as borrowed money that must be repaid, not as earned income.
Can I take a student loan interest deduction on my tax return?
Looking Ahead – Student Loan Interest: As you repay the loan and make interest payments, you may be able to take a student loan interest deduction on your tax return. The value of the deduction depends on your income and your tax bracket.
Does student loan forgiveness impact tax savings?
Now, let’s consider student loan forgiveness, which has its own tax implications: Unlike the interest deduction, forgiven loan amounts are considered taxable income.
Are student loans taxable in 2024?
For 2024, this deduction phases out at $70,000 for single filers and $145,000 for joint filers. Unlike wages and salaries, which are subject to federal income tax, Social Security, and Medicare taxes, student loans are not taxed because they are a financial obligation, not income. This distinction impacts tax liabilities and financial planning.