How Do Student Loans Factor Into Your Taxes?

Student loans can factor into your taxes as the interest is often tax deductible. So, you can reduce your tax bill if you include the amount of interest you've paid during the tax year. But student loans can affect your tax bill in other ways as well, such as if you've participated in a loan forgiveness program or if you've received student loan payment assistance. Learn more about what you need to know.

Student Loan Interest Tax Deduction

The student loan interest tax deduction is designed to reduce your taxable income, based on how much student loan interest you've paid during the year. It's important to note that you don't receive a deduction based on how much you've made in payments. Instead, you can only deduct your interest payments, up to $2,500.

The student loan interest tax deduction is an above-the-line deduction, meaning you don't have to itemize in order to claim it.

How to Qualify for the Student Loan Interest Tax Deduction

To qualify for the student loan interest deduction, you must meet the following criteria:

• Have paid interest on a qualified student loan, which is one used for education purposes for yourself, a dependent, or a spouse
• Be legally obligated to pay interest on the student loan
• Married filing separately isn't your filing status
• Your modified adjusted gross income (MAGI) is below the threshold set by the Internal Revenue Service (IRS) each year

If you paid interest on your student loans, your loan servicer will send you a 1098-E if the interest you paid amounted to at least $600 during the year. However, even if you paid less than that amount, you can request a 1098-E from your lender or servicer. This document will tell exactly how much student loan interest you paid and how much you can deduct.

Student Loan Forgiveness and Taxes

If you're eligible for student loan forgiveness, you might also have to pay taxes, depending on the situation. This can be an unpleasant surprise if your student debt is forgiven or is partially forgiven, and then you still need to pay a tax bill.

If you are having trouble repaying your loans, consider your options for getting out of debt, including a debt consolidation loan or a debt relief program.

Public Service Loan Forgiveness (PSLF)

Those who qualify for Public Service Loan Forgiveness (PSLF) don't have to worry about paying taxes on the amount forgiven. As long as you meet the eligibility requirements of working for a qualified employer and make 120 qualifying payments, you can have your loan balance(s) forgiven without a tax consequence.

Income-Driven Repayment Forgiveness

Depending on the type of income-driven repayment plan, you might be eligible for loan forgiveness after 20 or 25 years. After being on an income-driven repayment plan for the required amount of time, the remaining balance is canceled. However, that cancellation ordinarily comes with a tax bill.

As such, you could be on the hook for tens of thousands of dollars in taxes, depending on how much is ultimately forgiven.

Employer Student Loan Repayment Assistance and Taxes

Some employers offer benefits to their employees, including helping them with their student loan payments. As with some types of student loan forgiveness, this form of aid is usually taxable. So if your employer offered up to $5,000 to help you repay your student loans during the year, for instance, that amount would be added to your taxable income. You would determine your taxes based on that total income.

However, as with income-driven repayment, COVID-19 relief has suspended the taxes on these amounts. Through 2025, if an employer offers student loan repayment assistance, you won't immediately be taxed on the amount provided.

Congress could decide to make these tax provisions permanent, but it's important to take advantage of them now, if you can, just in case Congress chooses not to act and you end up on the hook for taxes down the line.

The Bottom Line

Your student loans can have an impact on your tax return. If you have paid interest on your student loans, you might be able to deduct a portion of that interest from your taxable income.

Additionally, some types of loan forgiveness come with tax consequences. Review your financial circumstances and consider speaking with a tax professional to find out what the tax benefits and consequences are regarding your student loans.