Gone are the days when a part-time job could cover the cost of college. The average tuition costs for a four-year public school in 1977 totaled only $2,600 (adjusted for inflation), according to College Board. For the 2016-17 school year, those costs add up to an average of $9,650.
It’s common for college students to use student loans to help pay for their education. In fact, there are 44.2 million Americans with student loan debt. But what does that debt mean for you at tax time?
If you’ve applied for student loans and are receiving disbursements, you might be wondering: Do student loans count as income?
Are student loans considered income?
“Student loans are not considered taxable income because it is expected that you’ll pay that money back at some point,” said Josh Zimmelman, the owner of Westwood Tax & Consulting.
When you borrow money to pay for school, you don’t need to report your loan amounts as income on your tax return. It might feel like you should because you’re receiving money, but those funds aren’t truly yours. It’s borrowed money that you have to pay back with interest.
Rather than counting as income on your taxes, Zimmelman pointed out, student loans can actually provide some tax benefits.
“There are tax credits for higher education expenses,” said Zimmelman. Even if you pay for your schooling with student loans, it’s possible to claim tax credits with options such as the American Opportunity Credit or the Lifetime Learning Credit. The advantage of tax credits is that they directly lower the amount of tax you owe.
The American Opportunity Credit can result in up to $2,500 per year in tax credits for your first four years of college. The Lifetime Learning Credit allows you to claim up to $2,000 a year.
Once you start repaying your student loans, you can still get a tax break because the interest you pay is tax deductible. The student loan interest tax deduction allows you to reduce your taxable income by up to $2,500 a year, lowering your total tax bill. You can even see how much you could save using this deduction with this student loan interest deduction calculator.
What about scholarships and grants?
You don’t have to claim student loan money as income since you have to pay them back with interest. But what about scholarships and grants? That’s free money you receive for school — funds you don’t have repay.
According to Zimmelman, whether you claim scholarships and grants as income on your taxes depends on how you use the money.
“Financial aid and grants are generally not considered taxable income, provided the money is spent for tuition, fees, books, and other supplies for classes,” he said. “Grants and scholarship money used for other purposes like room and board must be reported as taxable income.”
Zimmelman also pointed out that you have to report income from work-study programs. Work-study is a type of financial aid, but it is still money earned. As such, it has to be reported to the IRS.
When student debt could be taxed as income
Even though student loans are not considered income when the money is disbursed to you, it doesn’t mean you’re totally in the clear.
“If your student loan debt is later forgiven instead of being paid back, it becomes taxable,” said Zimmelman. “The amount forgiven will be considered a cancellation of debt, which is taxable as income.”
When your loans are forgiven, you don’t have to pay the debt back. In most cases, it would then be considered money you received as a benefit, making it taxable income. This includes any forgiveness you may receive as the result of an income-driven repayment plan.
With these plans, your monthly loan payments are based on your income and you repay your debt for 20 or 25 years. Once that repayment period is complete, any remaining student loan balance is forgiven. At that point, the forgiven amount is considered income, meaning a higher tax bill for you.
The exceptions to this tax rule are Public Service Loan Forgiveness and Teacher Loan Forgiveness. If you qualify for these programs and your remaining loan balance is forgiven, you won’t have to pay taxes on the forgiven amount.
Before accepting a plan that involves student loan forgiveness, consider consulting with a tax professional to determine the impact.
Know your options ahead of time
In a perfect world, everyone would be able to afford college without having to worry about student loan debt. For most people, however, paying for college without help is practically impossible.
In most cases, your student loan debt won’t be taxed as income. But keep the situations when you could face a tax bill for student debt in mind. This way, you can complete your tax return accurately.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.24% – 7.24%3||Undergrad & Graduate|
|2.47% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|