How Student Loans Affect Your Taxes

Whether you’re a parent, guardian, or student, funding higher education is expensive. Most families piece together different funds to help pay for school—savings, gifts, earnings from a part-time job, and grants. Student loans, one of the most popular ways to afford a degree, are also usually part of the plan. 

Student loans impact your finances during school and after graduation. The loans also affect your money during tax season. But here’s the good news—student loans never count as taxable income. The loans might be able to help you save money on your taxes, though. Here’s everything you need to know.

Student loans and taxes

If you ever have to make student loan payments, you know how the loans impact your finances. Whether you owe $50 each month or $2,000, the cost adds up. For some borrowers, student loan payments delay other financial goals like purchasing a home, getting engaged, or starting a family. 

But as you prepare for tax season, your student loans might actually help your finances. The government provides deductions and tax credits to help offset some of the burden of student loans. Your filing status can also impact your student loan payments and tax benefits.

Ask the expert

Crystal Rau

CFP®

There is no difference in how federal and private loans affect your taxes because both federal and private student loan interest is tax deductible in the year in which it was paid. Per the IRS, student loan interest is deductible up to the lesser of $2,500 or the amount you actually paid in interest on a qualified student loan. A qualified student loan is a loan taken out solely to pay qualified higher education expenses.

How do student loans affect taxes? 

Student loans impact your taxes, usually in ways that help you save money during tax season. Here’s what you need to know about each tax scenario. 

Question	Answer
Do you have to claim student loans on taxes?	❌
Can student loans take your taxes?	✅
Do student loans count as income on taxes?	❌
Can student loans be deducted from taxes?	✅
Am I eligible for education tax credits?	❓It depends
Should married couples with student loans file taxes separately?	❓It depends
Can student loan default offset your tax refund?	✅

Do you have to claim student loans on taxes?

It doesn’t matter whether you are the student, a parent, or the guardian, you never need to claim student loans as income on your tax return. The borrower will eventually repay the loan, which means that it is not taxable income. Therefore, you don’t need to claim student loans.

How you spend the money from student loans also does not impact your tax return. For example, using your student loans to pay for living expenses like rent or food does not affect your taxes. 

Not having to claim your student loans as income is generally good news for your taxes. Your taxable income is usually lower than if you had to claim the loans. In other words, you would probably owe more taxes if you had to include your loans as income. 

Can student loans take your tax refund?

If you default on your student loans, the government can take your tax refund to help pay for what you owe. The collections program paused during the pandemic and does not currently collect tax refunds to satisfy student loan payments. Collections efforts will resume after September 2024.

In addition to pausing collections, the government also created The Fresh Start program. It’s a one-time temporary relief initiative that allows borrowers in default to return to “current” status. If your loans are in default, you automatically have the following benefits:

• Your loans will appear as “current” on your credit report. 
• The government will not keep tax refunds or withhold other tax credits. 
• You can access income-driven repayment plans for student loans. 
• The government will not garnish your wages or seize assets to collect payment. 
• You can access additional government loans, like student aid and mortgages. 

You must enroll if you want to continue receiving the program’s benefits after September 2024. Contact your loan holder to begin the process. If you need help finding that information, call 1-800-621-3115. 

You can request enrollment online, over the phone, or by mail if the U.S. The Department of Education holds your loans. Here’s how. 

• Online: If you know your login, you can go to myeddebt.ed.gov.
• On the phone: You can call 1-800-621-3115.
• In the mail: You can write a letter to P.O. Box 5609, Greenville, TX 75403. Include information about your request, your name, Social Security number, and date of birth. 

Do student loans count as income on taxes?

Student loans do not count as taxable income. Because of that, you do not have to claim the money on your tax return. According to the IRS, the following are types of income: wages, dividends, capital gains, business income, and retirement distributions.

Even though student loans do not count as income, the interest from the loans can adjust your income. Income adjustments lower your taxable income, which reduces your tax burden. That’s good news for your finances since it typically results in lower tax payments. 

Can student loans help lower your taxes? 

You can deduct student loan interest from your taxes. Student loan holders can deduct up to $2,500 each tax year, depending on the amount of interest and type of loan. Deducting interest helps lower your adjustable gross income (AGI). 

A lower AGI can help you qualify for other tax credits or benefits, which can help reduce your tax bill. However, only some borrowers qualify for the student loan interest deduction. You must meet the following criteria to take advantage of it.

• You do not qualify for the interest deduction if you earn more than $100,800 as a single filer or $175,000 if you file a joint return.
• You qualify for a reduced interest deduction if you earn between $70,000 and $85,000 as a single filer or $145,000 and $175,000 if you file a joint return.  
• You cannot claim the deduction if someone else claims you as a dependent on their tax return. 
• You cannot claim the deduction if you are married and filing separately. 
• You are legally required to pay interest on your student loans. 

If you qualify, the student loan interest deduction is a valuable way to lower your taxable income. It’s helpful to calculate your student loan tax deduction in advance so you know what to expect at tax time.  

Am I eligible for education tax credits?

The government offers two tax credits for students enrolled in higher education — the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). Whether or not you have student loans does not impact your eligibility for the tax credits. 

You can utilize the AOC credit for multiple eligible students each year. But you can only use the LLC credit once per return. Depending on your circumstances, you can claim both credits for different students on the same tax return. 

For example, imagine you are a parent with two children. One of your children, John, is pursuing an undergraduate degree at a local university. Jane is also in a program, but it’s an apprenticeship for future electricians. You help pay their tuition expenses and claim them as dependents on your tax return. 

During tax season, you can utilize the American Opportunity Credit for John and the Lifetime Learning Credit for Jane. In this instance, claiming both credits on the same tax return is okay since the credits are for two different people. 

The American Opportunity Credit is up to $2,500 per eligible student. Here’s how to qualify.

• The person claiming the tax credit must earn less than $90,000 if you are single, head of household, or qualifying widow.
• The person claiming the tax credit must earn less than $180,000 if you are married and filing jointly.
• The person claiming the tax credit cannot file a separate tax return if they are married. 
• The student cannot finish the first four years of a postsecondary program before the tax year ends. 
• The student must be pursuing a degree or recognized credential.
• The student must be enrolled at least half-time. 

The Lifetime Learning Credit is up to $2,000 per return, and the eligibility criteria are less strict. Here’s how to qualify.

• The person claiming the tax credit must earn less than $90,000 if you are single, head of household, or qualifying widow.
• The person claiming the tax credit must earn less than $180,000 if you are married and filing jointly.
• The person claiming the tax credit cannot file a separate tax return if they are married. 

Should married couples with student loans file taxes separately?

If you and your spouse both have student loans, you might consider whether to file your tax returns jointly or separately. Married couples can file either way, but it usually makes sense to file jointly. 

The IRS strongly encourages married couples to file jointly and provides tax incentives for couples who do so. For example, you can only qualify for the Lifetime Learning Credit or the American Opportunity Credit if you are married and file jointly. Similarly, you can only qualify for the student loan interest deduction if you are married and file jointly. 

However, income-driven repayment plans allow you to spread your loan payments over 20 or 25 years. As a result, payments are smaller. Sometimes, you can secure lower monthly payments for one or both spouses if you are married and file your tax return separately.

In most cases, it makes sense for married couples to file joint returns. But if your top priority is to lower your monthly student loan payment, then it might make sense to file separately. You can calculate sample returns using both filing statuses if you’re unsure which option is best.

Can you avoid a tax offset due to defaulting on your student loans?

The Treasury Offset Program allows the U.S. Department of Education to garnish tax returns if taxpayers have accounts in default. You will not receive your refund from your tax return if the government garnishes it. 

Instead, the money goes to the government to repay your student loan debt. The Treasury Offset Program only applies to federal student loans. If you default on private student loans, there is a different collections process.   

But here’s the good news—no accounts are currently in default due to the Fresh Start Program. However, automatic enrollment in the program ends in September 2024. If you want to continue receiving the program’s benefits, you must enroll. You can call 1-800-621-3115 to learn more.

What else do you need to know about filing taxes with student loans?

The federal government provides different programs to help offset the burden of student loans and the cost of higher education. Knowing about the programs and tax benefits is helpful so you can take advantage of them. One of the most essential aspects is that you never have to claim your student loans as income.

You can likely take advantage of the student loan interest deduction for federal and private student loans, which lowers your taxable income. You must meet the income requirements, but most working-class and middle-class Americans qualify. 

You might be able to utilize education tax credits if you’re enrolled in a course or program for further education, even if you don’t have student loans. The tax credits help provide additional money to taxpayers to reduce the cost of education.

As you prepare for tax season, consider how tax credits, interest deductions, and filing status can help lower your tax bill.