Gone are the days when a part-time job could cover the cost of college. The average undergraduate college costs (including tuition, room and board) at four-year universities for the 1978-79 academic year was $2,967, according to the National Center for Education Statistics. Forty years later, in 2018-19, four-year public colleges charged $10,230 for in-state students and $26,290 for out-of-state students, according to the College Board.
More and more students use student loans to cover these costs. While student loans are not taxable income when they’re disbursed to you — meaning you don’t need to report them as income to the IRS — that situation could change if your loans are forgiven under certain programs. Here’s what you need to know about student loans and your taxes.
Are student loans taxable income?
The short answer is no.
“Student loans are not considered taxable income because it is expected that you’ll pay that money back at some point,” said Josh Zimmelman, owner of Westwood Tax & Consulting LLC in New York.
When you borrow money to pay for school, you don’t need to report your loans as income on your tax return. It might feel like you should because you’re receiving money, but those funds aren’t truly yours. Loans are borrowed money that you have to pay back with interest.
But rather than counting as income on your taxes, Zimmelman pointed out, student loans can actually provide some tax benefits.
What is the student loan interest deduction?
Once you start repaying your student loans, you could receive a tax break because the interest you pay is tax-deductible. The student loan interest deduction allows you to deduct from your taxable income up to $2,500 a year in student loan interest that you paid, potentially lowering your total tax bill.
There are some restrictions, though. You can’t take the deduction if your tax filing status is married filing separately; if someone else claims you as a dependent on their tax return; or if your modified adjusted gross income is $80,000 or more (or $165,000 or more if you file taxes jointly with a spouse). You can deduct a reduced amount if your modified adjusted gross income is between $65,000 and $80,000 (or between $135,000 and $165,000 if you file taxes jointly).
Use our Student Loan Interest Deduction Calculator to see how much you could save by taking advantage of this deduction .
While in school, you can also claim tax credits for your education using the American Opportunity Credit or the Lifetime Learning Credit. The advantage of tax credits is that they directly lower the amount of taxable income — and thereby the tax you owe. If you qualify, the American Opportunity Credit can result in a tax credit of up to $2,500 per year for your first four years of college. The Lifetime Learning Credit allows you to claim up to $2,000 per tax return.
Are scholarships taxable income?
Whether you claim scholarships and grants as income on your taxes depends on how you use the money, Zimmelman said.
“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. While work-study is a type of financial aid, it is still money earned. That means it has to be reported to the IRS.
When student debt could be taxed as income
While student loans are not considered income when the money is disbursed to you, you may not be completely in the clear.
When your loans are forgiven, you don’t have to pay the debt back. In most cases, the forgiven balance could 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.
Under these plans, your monthly loan payments are tied to your income and you repay your debt for 20 or 25 years, depending on the plan you chose. 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 federal income tax bill for you.
The exceptions to this 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 pursuing a plan that involves student loan forgiveness, consider consulting with a tax professional to determine the impact.
Know your options ahead of time
For many people, paying for college without taking out student loans is extremely difficult. That means it’s important to understand how your student loans impact the rest of your financial life, including your taxes.
In most cases, your student loan debt won’t be taxed as income, and you may even benefit from the student loan interest deduction. But keep in mind the situations when you could face a tax bill for student debt. That way, you can prepare for a potential tax bill long before it’s due.
Sage Singleton Evans contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
4 Important Disclosures for SoFi.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.