April 6, 2022 Update: The Biden Administration has extended the pause of federal student loan payments, interest, and collections through August 31, 2022.
Student loans have become a tremendous burden for many young adults and parents today. With college costs skyrocketing and little hope to cover tuition without borrowing funds in some fashion, getting stuck with those student loan payments is almost certainly a fact of life after graduation. While you can’t typically escape student loan payments there is some COVID relief available provided by the CARES Act, the American Rescue Plan, and the President’s executive orders to help students with federal student loans. Aside from the temporary relief, are there any tax breaks that ease the burden of student loans?
Below, we’ll explore the student loan tax deduction and how you can minimize the taxes you owe while you’re still in college.
What is the Student Loan Tax Deduction?
Luckily, taxpayers who make student loan payments on a qualified student loan may be able to get some relief if the loan they took out solely paid for higher education.
In many cases, the interest portion of your student loan payments paid during the tax year is tax-deductible. Your tax deduction is limited to interest up to $2,500 or the amount of interest you actually paid, whichever amount is less. If you took advantage of the COVID emergency relief, which allowed suspension of loan payments, you may see a lower student loan deduction than usual, even none at all. As with most credits and deductions, there are limits in place.
You can deduct student loan interest if:
You paid interest on a qualified student loan in the tax year
You are legally obligated to pay interest on a qualified student loan
Your filing status is not married filing separately
You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return, or
You are a single filer with income under $70,000. However, your full deduction phases out (is gradually reduced) between $70,000 and $85,000 ($140,000 and $170,000 married filing jointly). If your income falls above those limits, the student loan interest is not tax-deductible
. Note: These thresholds are for tax year 2020 (the taxes you file in 2021).
The other good news regarding the student loan interest deduction is that you do not need to itemize your deductions in order to claim it. This makes sense considering many recent college graduates are not itemizing tax deductions and instead claim the standard deduction.
If you paid $600 or more in interest to a single lender during the year, you should receive a 1098-E form showing how much interest you paid for that time frame. If you made student loan payments but did not receive a 1098-E, you are still entitled to claim the interest deduction, but you may need to call the lender or pull up your records online.
*Note: The income thresholds listed in this image above are for the 2020 tax year (the taxes you file in 2021).
What Does the Coronavirus Relief Mean for Student Loans?
We know times may be hard for students and their families right now due to the coronavirus (COVID-19). As a combination of the CARES Act followed by the American Rescue Plan and President Joe Biden’s executive orders, there are several forms of relief being provided for student loan borrowers. Find out, “What Coronavirus Relief Means for College Students and Grads” here.
One specific provision of the CARES Act, the U.S. government stimulus and relief package designed to help Americans during the pandemic, allows employers to make student loan payments on behalf of employees of up to $5,250 per employee each year from 2021 to 2025 (totaling up to $26,250).
It’s important to know that if your employer provided you with student loan payback assistance, that money might be considered taxable income.
The CARES Act initially suspended student loan payments and interest until the end of September 2020. However, President Joe Biden’s January 2021 executive order expanded relief and suspended student loan payments and interest until September 30, 2021.
On April 6th, the Biden Administration extended the suspension of federal student loan payments, interest, and collections through August 31, 2022.
The pause includes the following relief for eligible student loans:
Suspension of loan payments
0% interest rate
Stopped collections on defaulted loans
Note: You do not have to pay a fee to get 0% interest or suspended payments for federal student loans.
The American Rescue Plan provides relief to students with government and federal student loans by allowing students with forgiven loan debt to exclude the discharged debt from their taxable income for tax years 2021 through 2025.
The provision does not apply to loans made by private lenders.
What Other Tax Information Might Apply to Students?
- Your credit card interest might be deductible:
If you use your credit card for qualified educational expenses, you might be able to write off the interest on your taxes. But there is one condition: every item charged to the card must be used exclusively for school-related needs, otherwise you can’t write anything off.
- Loan forgiveness can result in a tax bill:
If you’re on an income-driven student loan forgiveness program, you might owe a large tax debt after the loan is forgiven. The IRS might consider the forgiven debt to be income.
- Consolidated student loans still qualify for the student loan tax deduction:
If you have multiple student loans (covering multiple semesters, for example), your student loan interest is probably still deductible on your taxes.
If I Default on My Student Loan, Does it Affect My Taxes?
If you halt payments to your student loan servicer and your loan goes into default, there may be a few serious consequences. For example, the government could garnish your tax refund until your debt is repaid. Other federal benefits, like any Social Security payments, would also be subject to garnishment.
Note: If you’re struggling to make your student loan payments, COVID-19 emergency relief provided by way of the CARES Act, the American Rescue Plan, and the President’s executive orders allows students with federal student loans relief. The President’s most recent order on April 6, 2022, extends the student loan pause until August 31, 2022.
What Forms Do I Need to Fill Out My Taxes as a College Student?
Before the April 15th tax deadline, you’ll receive tax forms in the mail reporting any income you made and expenses that may be deductible. These forms might come from your previous employers, payers who you provided services to, your college, loan servicers, your bank, and any retirement accounts you have set up.
It’s a good idea to have all your documentation in front of you when you sit down to file so you report all of your income and don’t miss any tax deductions or credits you deserve. Even if you don’t receive forms reporting your income you still have to report any income paid to you on your taxes.
Didn’t receive a form that reports your income? Don’t worry, TurboTax partners with hundreds of financial institutions allowing you to automatically import your W-2, 1099, and 1098 information. With TurboTax W-2 import, over 150 million W-2s are supported. You can also jumpstart your taxes by snapping a photo of your W-2 and 1099-NEC eliminating data entry.
Here are a few of the forms you might need to look out for:
This form comes from your employer and shows what taxes were withheld from your paycheck.
- Form 1099-NEC:
You’ll receive a
if you did any freelance or contract work, but you weren’t an official employee. This is only applicable if your income was over $600 total for the year. Even if you don’t make $600 and don’t receive a 1099-NEC you still have to claim your income on your taxes.
- Form 1098-E:
If you paid over $600 in interest for student loans, your lender should send this form to you.
- Form 1098-T:
1098-T is your tuition statement, which your college or university should send to you. It will show the amount of tuition you paid, tuition-related expenses, and any grants or scholarships applied.
- Form 8863:
This form is filed with your taxes and is necessary to claim education credits like the Lifetime Learning Credit or the American Opportunity Credit, for example. With TurboTax you don’t need to worry about filling out forms filed with your taxes. TurboTax will fill out the appropriate forms and give you the tax deductions and credits you’re eligible for based on your entries.
Tax Tips for Students
Heading into tax season and want a few more tax tips to help you through? Read some of our tax tips below.
Tip #1: File even if you’re below the income threshold
If you make less than the IRS income filing threshold, which changes each tax year, you’re not required to file a tax return. Generally, if you made under the standard deduction for the tax year ($12,400 single or $24,800 married filing jointly for 2020 and $12,550 single or $25,100 married filing jointly for 2021) you are not required to file a tax return. But even if you make less than the specified amount, you might still be owed a tax refund if your employer withheld taxes or if you are eligible for some other tax credits like education credits or a recovery rebate credit. The IRS reports close to a billion dollars in unclaimed refunds every year, some of which belongs to college students who file their taxes.
Tip #2: Get a tax refund for work-study opportunities
Many college students end up in a work-study program to explore their career interests and get experience in their desired field. Any money you earn is considered taxable income. However, the school will withhold income taxes from your paychecks, so you may get a refund when it’s time to pay taxes.
Tip #3: Pay attention to your location
Do you attend school in a different state than your permanent residence? Then you may have to pay taxes on any income you’ve made in another state. If you have jobs in each location, your earnings are likely subject to different tax rates. In some cases, this might work out in your favor. For example, if you work in a state without income taxes, that can help lower the overall amount of tax you pay.
Claiming Your Student Loan Tax Deduction and More with TurboTax
Don’t worry about knowing and memorizing all the tax laws that may apply to you as a college student. TurboTax has you covered and will ask you simple questions about your circumstances and give you the tax deductions and credits you’re eligible for based on your answers.
You can easily do your taxes on your own and get your questions answered along the way. TurboTax is a user-friendly tax software that helps you easily file your taxes. With TurboTax, you can find every student tax deduction you’re eligible for so you can enjoy a bigger refund without any headaches.
If you still have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average 12 years of experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish, year-round and can also review, sign, and file your tax return or you can fully hand over your taxes to them.
Lisa has over 20 years of experience in tax preparation. Her success is attributed to being able to interpret tax laws and help clients better understand them. She has held positions as a public auditor, controller, and operations manager. Lisa has appeared on the Steve Harvey Show, the Ellen Show, and major news broadcast to break down tax laws and help taxpayers understand what tax laws mean to them. For Lisa, getting timely and accurate information out to taxpayers to help them keep more of their money is paramount. More from Lisa Greene-Lewis