How Student Loans Affect Taxes


Properly including student loans on your taxes could increase your refund.

Is College Tuition Tax Deductible?

It’s tax time- again! You’re probably feeling pretty confident about how to complete your return since it’s not your first time around the block. Of course, you hate to kiss your money goodbye when you feel that now, as a young student, is when you need it the most. However, if you have recently added educational expenses to your budget then you’ll be including more on your return this year than just employment information. Doing so may reduce the amount of taxes you owe.

First, know that how you file your taxes affects aspects of your student loans and what school expenses you’re responsible for. Conversely, your school expenses and student loans affect the amount of taxable income you need to claim on your tax return. Sounds confusing already, doesn’t it? To help you navigate these vital details, I’ve asked our Student Loan Specialist, Ciaria Colson, and CEO of Happy Tax, Mario Costanz to supply the answers you may not have known you needed.

What kind of tax breaks does the IRS have for education?

Colson: “There are tax breaks for education expenses and interest paid on student loans. Education expenses and interest amounts paid on student loans during the prior year can be reported when filing taxes.”

If my employer helps pay my student loans, do I have to record this as income?

Colson: “Yes, it is my understanding that if an employer pays student loans on their employee’s behalf, a certain portion of the amount paid is taxable by the IRS against the employee.”

Is there a minimum of expenses or interest paid that I must meet in order to claim these amounts on my taxes?

Colson: “[Some] questions may be best answered by a tax professional.”

– Good advice, Ciaria! Luckily, Founder of Happy Tax, Mario Costanz stepped up to the plate. He has been a part of the Tax and Finance industries for over 15 years and has operated over 100 tax preparation offices. This was his answer:

Costanz: “There is no minimum amount of educational expenses that you must incur in order to claim the student loan interest deduction, but there is an income cap. You can deduct your student loan interest only if your modified adjusted gross income is less than $80,000 ($165,000 if married filing jointly).”

Is there a maximum amount the government will deduct?

Costanz: “You can only deduct up to $2,500 in student loan interest even if you do qualify, so borrowing too much isn’t a good idea. You can’t deduct loans taken out for reasons other than paying qualified education expenses, and you can’t deduct student loans from a related person or made under a qualified employer plan. Only the loans that you personally took out for qualified education expenses can be deducted.”

I’ve heard of deductibles when it comes to insurance, what does deductible mean in tax terms?

Colson: “Deductible means that an amount is deducted from the person’s income thus reducing the amount of income subjected to being taxed. This can help in increasing the overall refund.”

Can I claim an interest deduction for part of the year even if I am in default?

Colson: “This is possible. If payments have been paid towards student loans at any point in the year, any interest that was paid will have the amount reflected on your 1098-E interest statement and can be claimed during filing.”

Defaulting on your student loans can reduce your tax refund


How else might default affect my tax return?

Colson: “If student loans are in default (no payments made after 270 days), tax refunds can be offset. This means the Department of Education can collect the entire amount of the refund to apply towards the debt.”

If I received student loan forgiveness this year, does it need to be mentioned on my tax return?

Colson: “Most student loan forgiveness programs require the amount forgiven (indicated on a 1099-C) to be reported as income and therefore is taxable by the IRS.”

How can my tax status affect my student loan payment?

Colson: “The tax filing status of an individual can directly affect their student loan payments if an Income-Driven repayment plan is chosen. When filing married jointly, the combined adjusted gross income of both spouses is used by the US Department of Education to determine the payment on any income-driven repayment plans. This causes a very large increase in payment when compared to a payment for an individual filing married separately or single.”

What are some other ways someone with student loans might save on their taxes?

Costanz: “Nearly 80 percent of all taxpayers will see a lower tax bill next year thanks to the Tax Cuts and Jobs Act, but whether and how much you save depends on your particular facts and circumstances. The standard deduction nearly doubles from 2017 to $12,000 for individual filers ($24,000 for married people filing jointly), but his only applies if you typically don’t itemize your deductions. So, if your charitable giving, mortgage interest, student loan interest, and other deductions don’t add up to $12,000, it no longer makes sense to itemize. The recent tax reform law is the first of its kind in nearly 30 years, and it impacts just about everybody. As a result, it’s more important than ever to make sure you have sound tax advice.”

There are many things to know when it comes to tax law. If you have been preparing your own taxes for the past few years, but have questions or curiosities about your educational expenses on this year taxes, it may be time to sit down with a tax professional.

Before attending your appointment, be sure to write out a list of possible questions you might have. Then, don’t be afraid to get those answered along with any others that might come up in your appointment. Use that time with the professional to understand why you are filing a certain way; divulge all expenses you face throughout the year, and ask for ways you might reduce your tax liability in the future.

You may want to ask family and friends for recommendations on tax preparers or Certified Public Accountants. Costanz also offers his company’s mobile app, “Happy Tax,” that can connect you to licensed CPAs in your area who are ready to reconcile your school expenses, student loans, and tax situation to your benefit.

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