Are student loans taxable income?

The large majority of today’s college students use student loans — at least partially — to foot the bill. In fact, according to the Department of Education, nearly 43 million Americans currently have at least one federal student loan to their name.

But while these loans can certainly reduce your financial burden when attending school, they can also influence your annual tax liability, too.

Here’s what you need to know about student loans and their impact on your tax returns.

Is a student loan taxable income?

Fortunately, the majority of student loans are not considered taxable income in the eyes of the IRS. As long as the loans are repaid, you won’t have to report the loans on your tax returns nor pay taxes based on their amount. (If they’re not repaid, you might get taxed. More details on this are below).

DO COLLEGE STUDENTS NEED TO FILE TAXES

Scholarships and grants hold a similar place in the IRS’s mind. Neither are taxable, as long as you use the funds to cover required school costs at an eligible college or university. In the case of an overage (say you’re issued a $10,000 scholarship but only have a tuition bill of $5,000), you will need to pay taxes on the difference.

Here are some other education-related earnings that aren’t considered taxable income either:

• Free housing, room and board for resident advisors and other campus employees
• Funds from college savings plans and 529s
• Student loans that have been forgiven under the Public Service Loan Forgiveness Program

Student loans that have been discharged due to the student’s death or disability are also not considered taxable at the federal level.

WHAT'S A STUDENT LOAN GRACE PERIOD?

How student loans impact your taxable income

While most student loans aren’t taxable, they do still have an impact on your annual tax burden. This is thanks to the student loan interest deduction, which allows you to write-off up to $2,500 in interest paid every year.

To qualify for the deduction, you’ll need to make less than $85,000 a year (if you’re single) or $170,000 (if you’re married, filing jointly). You’ll also need to have used the loans to only pay for qualifying higher education expenses and have been enrolled at least half-time in a degree, certificate or credential program when you took them out.

You should receive a Form 1098-E every year you’ve made student loan payments. This will break down the total interest you’ve paid and can be used when filing your annual returns.

These school-related earnings are taxable

Scholarships, grants and student loans aren’t usually considered taxable income, but there are a few college-related benefits that are taxable.

If you received any of the following in the last year, you might be required to pay taxes on them:

• Tuition assistance from your employer: Since this is an employee benefit with an exact dollar amount tied to it, it acts like income and is, therefore, taxable — just like your other wages.
• Work-study payments: Work-study payments also qualify as income, even if the money goes directly toward your tuition bill or housing.
• Stipends: If you earn a stipend for participating in a school sport, working on the campus newspaper, or acting in some other on-campus capacity, this is also considered taxable income. (This doesn’t include athletic scholarships, though).
• Canceled or forgiven student loan debt: Getting your debts wiped clean can certainly help financially, but you’ll have to pay taxes on any balance that was canceled out. Loans forgiven under the Public Service Loan Forgiveness Program are exceptions to this rule.

Fortunately, if you owe taxes on any of the above benefits, the student loan interest deduction may be able to help offset them. And if you’re looking for more ways to reduce your annual tax liability, be sure to talk to an accountant or financial advisor for help.