​​Do You Have to Claim Student Loans on Taxes? 

Education data has suggested that the total student loan debt is equivalent to about $1.77 trillion in the United States. The average graduate with a bachelor’s degree from a U.S. public university borrows $32,637. If you are one of the students who are paying back their loans, you might be wondering if you have to claim student loans on taxes.

To take advantage of tax breaks, you’ll want to be sure you’re aware of possible credits and necessary forms required during tax time to ensure that you can get all the benefits you are owed. To start, let’s take a look at whether or not student loans are considered taxable income. Please note that MoneyLion does not provide tax advice. Please consult a tax or legal adviser for guidance regarding your individual situation.

Does the IRS consider student loans taxable income?

The IRS does not consider student loans taxable income because you are required to pay them back. Student loans are treated like other loans, although you can deduct interest on federal student loans, offering potential tax advantages. Likewise, the American Opportunity Credit and Lifetime Learning Credit allow additional deductions. 

When financial aid may be taxable

Generally, financial aid is not taxable. However, some states are considering taxing student loan debt cancellation related to recently proposed student loan forgiveness programs.

In addition, your financial aid might be taxable if you exceed your qualified education expenses, even with student loan payments. 

These expenses include the following: 

• Books 
• Supplies 
• Student activity fees

Fees associated with room and board, as well as travel expenses, are not considered qualified education expenses. 

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How to qualify for student loan tax deductions

There are a handful of ways to qualify for student loan tax deductions. 

Student loan interest deductions

With a maximum of $2,500 in total, you might be eligible for an interest deduction on your student loans. Eligibility will be determined by your tax filing status and your income levels. 

For example, if you are single and your adjusted gross income is between $70,000 and $85,000, or you are filing jointly with an adjusted gross income of anywhere from $145,000 to $175,000 together, you would qualify for the student loan interest deduction. However, as with other deductions, there are requirements you must meet. 

For the loan to qualify, it must be used for qualified education expenses, the school must be an eligible institution, and the loan must have been taken out when the borrower was enrolled, at least part-time, in a program that leads to a degree or certification. The borrower must be the taxpayer or an eligible dependent as well.

Education tax breaks

You could be eligible for an education tax break if you paid for education expenses in the past year. These expenses can be claimed if you or your dependent paid educational fees. 

The eligible person must be listed on your taxes. They must also be enrolled in an eligible education institution. If you fulfill these requirements, you could qualify for a student loan tax break. 

American Opportunity Tax Credit

The American Opportunity Tax Credit, formerly known as the Hope Credit, is eligible for students who have not completed their first four years of higher education. You can get up to $2,500 in tax credit per eligible student if you qualify. 

Suppose the credit brings the amount you owe on your taxes to zero. You could have 40% of any remaining amount refunded to you directly, as long as it does not exceed $1,000. 

You can claim 100% of the first $2,000 of qualified educational expenses and 25% of the following $2,000 expenses as an eligible student. There are a few requirements to qualify for the American Opportunity Tax Credit. 

• You must be pursuing a degree, or other recognized education credentials, such as a certification.
• You must be enrolled at least part-time for at least one academic period that began in the applicable tax year.
• You cannot have finished the first four years of a higher education degree or recognized credential at the beginning of the applicable tax year.
• You cannot have claimed the American Opportunity Tax Credit for more than four prior tax years. 
• You cannot have a felony drug conviction at the end of the tax year.

Lifetime Learning Credit

The Lifetime Learning Credit is credit available to a much broader audience. This credit can be used to pay for qualified tuition and related expenses related to undergraduate, graduate, and professional degree courses. 

This even includes courses to improve your job skills or acquire new ones. This credit is worth up to $2,000 per tax return. 

Here are the requirements to qualify for the Lifetime Learning Credit:

• You or your dependent paid educational expenses. 
• The eligible person must be listed on your taxes.
• They must be enrolled in an eligible education institution. 

Tax-free 529 withdrawals

A 529 savings plan is designed for education expenses. This plan is tax-free and can be used to pay for qualified education expenses. When setting up this plan, a beneficiary is identified, and funds can be used for their expenses. 

A withdrawal will be considered tax-free if it is used for qualified expenses. However, if the withdrawal is not for qualified expenses, you are expected to pay income taxes on the withdrawal, and you’ll have to pay a 10% penalty. 

How to report student loan interest on your taxes

To report student loan interest on your tax return, you’ll use Form 1098-E. If you paid $600 or more in interest to a federal loan servicer during the tax year, you will receive at least one 1098-E. How many 1098-E forms you receive will depend on how much you paid in interest, how many federal loan servicers you had, and possibly other factors. 

With 1098-E, the student loan interest statement, you can report the amount of student loan interest you paid on your federal tax return and may be able to count as a deduction.

To get interest deductions deduction, you claim it on your income tax return, Form 1040. You don’t have to itemize your tax return to claim a student loan interest deduction. Instead, you can take the deduction as an exclusion from your income.

What are the consequences of not claiming student loans on taxes?

The potential consequences of failing to report student loans on your taxes include facing penalties or audits. Claiming student loans accurately can help you avoid these consequences. Likewise, if you defaulted on your federal student loans, the federal government could seize any federal tax refund you were expecting.

Tips for maximizing your tax benefits

To maximize tax refund benefits related to student loans, consider paying down your student loan interest early or consolidating loans for better tax outcomes. Consider options to take advantage of the Lifetime Learning Credit or American Opportunity Tax Credit. If in doubt, speak with a tax advisor or certified public accountant (CPA).

Maximizing Savings This Year

Student loans can be confusing, and so can taxes. With so many credits or tax options available, make sure you check with your tax preparer before filing to see if you qualify for any student loan tax credit or student loan tax breaks and ensure that you’ve claimed them correctly. 

You might be eligible for some great ways to save money or get a larger tax refund! Regardless of tax refund status, consider mastering budgeting basics to save more and start building financial freedom this year. 

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