Student loans and taxes | Kiplinger


Student loans are among the most common sources of debt in the United States. It has been reported that approximately one in five Americans has student loan debt totaling over $1.7 trillion.

If you’re one of those people, you’re probably waiting to hear if, in these times of high tuition and inflation, part of your federal student loan will be canceled or if the federal government’s pause on student loan payments and interest will be extended. (Stay tuned: News on the student loan forgiveness front is expected soon from the Department of Education.

In the meantime, however, it may be worth brushing up on some of the ways having a federal student loan can affect your taxes.

Student loans are not considered income

A typical question surrounding student loan debt is whether a student loan is income for tax purposes. The happy answer is no, the IRS does not consider student loans as income.

Taxable income generally consists of wages and salaries. The IRS also considers unearned income (for example, gains or profits from the sale of assets or stocks) to be taxable. Thus, since student loans are debts intended to be repaid with interest, they do not constitute taxable income and do not have to be declared as such on your income tax return.

You can sometimes deduct interest on student loans

Another good news about student loans and taxes is that you may be able to deduct the interest you pay on your student loan on your tax return. This deduction can potentially save you some money at tax time.

Currently, due to pandemic relief, student loan payments and interest are suspended until the end of August. However, normally when you pay interest, the IRS allows you to deduct either the amount of interest you paid in a given tax year or $2,500, whichever is less. Also, you don’t have to itemize your deductions to claim student loan interest, because the IRS considers student loan interest an adjustment to your income.

To claim the student loan interest deduction, you must have paid interest on what the IRS calls a “qualified student loan.” It is basically a loan that was taken out to pay for college fees for you, your spouse, or a dependent.

But whether you can claim a deduction for student loan interest depends on several other factors as well, including your filing status and income. This is partly because the student loan interest deduction is phased out based on the amount of your modified adjusted gross income.

For example, if you’re married and want to claim the student loan interest deduction, you can’t file separately, and you and your spouse can’t be claimed as dependents on your family’s tax returns. someone else. Also, your modified adjusted gross income must remain within a specified amount.

In 2022, if your modified adjusted gross income is less than $70,000 (if you are single) or $145,000 (if you are married and filing jointly), you can deduct the amount you paid or $2,500 , whichever is lower. However, single filers with adjusted adjusted gross income between $70,000 and $85,000 or married filers with income between $145,000 and $175,000 would see their student loan interest deduction reduced. This is because their modified adjusted earnings are higher.

More information about the student loan interest deduction can be found on the IRS website.

Student loan forgiveness may or may not be taxable

While it’s important to know whether student loans are income and whether you can deduct student loan interest on your taxes, the question of the day is whether federal student loans will soon be forgiven. What if part of your student loan is forgiven, it will be good news – if, of course, the cancellation of the student loan is not taxable to you.

Whether you are taxed on the amount of your federal student loan that is forgiven is complicated. This is partly because there are different types of student loan programs and repayment plans. And it’s unclear how a large-scale federal student loan forgiveness program would treat canceled or forgiven debt for tax purposes.

Generally, the IRS treats canceled and canceled debt as taxable income. There are a few exceptions to this that have applied to student loans recently, mainly due to legislation passed during the COVID-19 pandemic. For example, the American Rescue Plan Act (ARPA) suspended student loan forgiveness taxes from 2021 to 2025 for people whose student loans are classified under the income-contingent repayment program. ARPA has also provided similar relief under other reimbursement programs.

In addition, student borrowers whose loans have been canceled under the Public Service Loan Forgiveness Program are also currently exempt from tax on the canceled amounts. (Eligibility for this program was also expanded recently).

As a result, you’ll have to wait and see if a large federal student loan forgiveness materializes and, if so, whether the forgiven amounts will be taxable.

Employer repayment assistance may be taxable to you

In light of the pandemic in 2020, Congress passed the CARES Act, which contained provisions allowing employers to contribute money to their employees’ federal or private student loans.

Under CARES, employers could directly contribute $5,250 each year tax-free to employee student loans. This student loan repayment assistance from employers has been extended to 2025.

If your employer offers this benefit, it is currently a way to reduce your student loan debt that is tax-free for you. However, as this is a form of debt forgiveness, it is unclear whether after 2025, when the tax relief is due to expire, your employer student loan repayment assistance will be or not taxable to you.

Failure to repay your student loan can create tax problems

Data shows that a third of borrowers have already defaulted on their student loans, some more than once. But due to the recent pandemic relief (mentioned earlier), many borrowers who defaulted on their loans have been able to regain their good standing over the past couple of years. However, with the current runaway inflation and looming recession, it’s hard to say whether this so-called “fresh start” student loan relief will translate into fewer defaults.

Before default relief was introduced, the penalties associated with defaulting on student loans could be significant and included things like high negative points on your credit score and wage garnishment. The tax consequences of defaulting on your federal student loan were also severe. For example, the federal government could seize your tax refunds and even part of the refundable portions of certain tax credits.

Even though student loan payments are currently suspended, if you think you might not repay your federal student loan, contact the Department of Education or your loan officer to inquire about any available loan rehabilitation programs.

Various tax forms are associated with student loans

When you have a student loan, the interest you pay on it is reported to you on Form 1098-E if you paid at least $600 in interest during the tax year. (But remember, you probably haven’t been paying interest lately due to the pause on interest and student loan payments).

Normally, Form 1098-E is mailed to you, but you can also find a copy of your Form 1098-E on your loan officer’s website or by contacting your loan officer. You use the information provided on the form to claim the student loan interest deduction.

Another tax form that may be related to your student loans is Form 1098-T, which reports the amount of qualified tuition and related education expenses you paid during the tax year. Form 1098-T can be useful for claiming education tax credits which could also help reduce your tax bill.


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