Do you have to claim student loans on your taxes?

You don’t have to report student loans on your tax return. In fact, getting an education is more likely to result in a tax break than a tax bill. (Shutterstock)

Major life events and financial transactions, such as changing jobs or buying a home, can affect your taxes. This is also the case with federal and private student loans.

Whether you’re thinking about taking out student loans, are about to start repaying them, or you’ve been making payments on them for a while, this article will walk you through the potential tax implications of student loans.

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• Does the IRS consider student loans taxable income?
• Deducting student loan interest from your taxes
• How student loan forgiveness can affect your taxes
• Education-related tax breaks to know

Does the IRS consider student loans taxable income?

When you take out a federal or private loan, you have to repay the full amount with interest. So even if your college or university’s financial award letter calls these loans part of your "award," they’re not taxable income as far as the IRS is concerned.

When financial aid may be taxable

Student loans aren’t taxable income, but other forms of financial aid may be. In general, scholarships, grants, fellowship grants, and tuition reductions are tax-free as long as they meet the following requirements:

• You’re working toward a degree at an eligible financial institution.
• They don’t exceed your qualified education expenses.
• They aren’t earmarked for other purposes, such as room and board.
• They don’t represent payment for a service, such as teaching or researching.

Part of your scholarship, grant, or fellowship grant may be taxable if it exceeds your qualified tuition and related educational expenses. For example, if you receive a $20,000 scholarship, but your total tuition, fees, and course-related expenses are only $17,000, the $3,000 difference is taxable income.

You can learn more about the rules for excluding different types of financial aid from your taxable income in IRS Publication 970.

Deducting student loan interest from your taxes

If you’re new to student loan borrowing, you might be surprised to learn that student loans are more likely to result in a tax deduction than a tax burden.

IRS rules allow you to deduct up to $2,500 of student loan interest per tax year. You claim the deduction as an adjustment to income, meaning you don’t need to itemize to benefit from it. You can claim the student loan interest deduction whether your loans are federal or private, as long as the loans are used for qualified educational expenses, which include:

• Tuition and fees
• Room and board
• Textbooks

Qualifying for the student loan interest deduction

You have to meet a few rules to take advantage of the student loan interest deduction. First, you must have paid the interest on a "qualified student loan," meaning you used the loan to pay qualified educational expenses that were:

• For you, your spouse, or a dependent
• Paid within a reasonable period after taking out the loan
• Provided while you were enrolled at least half-time in a degree or certificate program

How much the deduction is worth

The student loan interest deduction is worth up to $2,500, but it’s gradually phased out for higher-income taxpayers.

The phase-out starts once your modified adjusted gross income (MAGI) exceeds $70,000 ($140,000 if you file jointly with your spouse). If your MAGI is $85,000 or more ($170,000 or more if filing jointly), you can’t claim the deduction at all.

MAGI is generally your adjusted gross income (AGI) from your Form 1040, but with a few items added back, such as your student loan interest deduction and nontaxable foreign earned income or housing allowances.

If your income falls within the phase-out range, you calculate your deduction by multiplying your student loan interest (capped at $2,500) by a fraction. Publication 970 also includes a worksheet to help you calculate your deduction.

What to know about Form 1098-E

If you paid interest on a student loan during the year, you should receive Form 1098-E from your student loan servicer or lender in late January or early February of the following year. This form shows the amount of interest you paid during the year. The loan servicer also sends a copy of Form 1098-E to the IRS.

It’s important to note that the IRS rules only require a lender to send the form if it received $600 or more of interest during the year, so you might not receive Form 1098-E, even if you paid eligible student loan interest during the year.

If you paid eligible student loan interest and didn’t receive Form 1098-E from your loan servicer, check your year-end statement or online account to determine how much interest you paid and calculate your deduction.

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How student loan forgiveness can affect your taxes

When your student loans are forgiven, you’re no longer required to pay some or all of your loans. The Department of Education offers several student loan forgiveness programs for federal loan borrowers, including those for people working in public service or as teachers.

The IRS typically views forgiven debt as taxable income. For a while, some student loan forgiveness was taxable, and some was tax-free. However, thanks to a provision included in the American Rescue Plan Act of 2021 (ARPA), that’s no longer the case — at least for now. The ARPA made all types of student loan forgiveness tax-free through Dec. 31, 2025.

Education-related tax breaks to know

While the student loan interest deduction benefits you after you leave school and begin repaying your loans, several tax breaks can help you lower your tax bill while you’re still in school.

Here’s a look at each of the education-related tax breaks you need to know and how to qualify for them.

American opportunity tax credit

The American opportunity tax credit (AOTC) provides a tax credit to help offset the cost of tuition, fees, and course materials required for attending the first four years at a college or university. It’s worth up to 100% of your first $2,000 and 25% of your next $2,000 of qualified education expenses, for a maximum credit of $2,500.

The AOTC is a partially refundable credit, meaning if it brings the amount of tax you owe to zero, up to $1,000 of the credit can be refunded to you.

While the AOTC is the most generous tax credit for education, it also has the strictest requirements. To qualify, you must be enrolled at least half-time for at least one academic period (such as a semester), and it’s only available for the first four years of your undergraduate education.

The AOTC also has income limits based on your MAGI. Your MAGI must be $80,000 or less ($160,000 or less if married filing jointly) to claim the full credit. If you’re a single taxpayer with a MAGI between $80,000 and $90,000, or married and filing a joint return with your spouse and have a MAGI between $160,000 and $180,000, you’re eligible for a partial tax credit. You can’t claim the credit if your income is above those upper thresholds.

You can claim the credit by completing Form 8863 and submitting it with your tax return.

Lifetime learning credit

The lifetime learning credit (LLC) is another tax credit to help offset the cost of college tuition and fees. It’s worth up to 20% of your first $10,000 of qualified education expenses, up to a maximum of $2,000 per return. 

Unlike the AOTC, none of the LLC is refundable. But it’s generally more available because it’s not limited to your first four years of higher education, and you don’t have to be enrolled at least half-time to claim it.

The LLC only applies to tuition and required fees paid directly to your college or university. It also has income limitations. Your MAGI must be $59,000 or less ($118,000 or less if you file a joint return with your spouse) to claim the full credit. You can’t claim the credit if you’re single and have a MAGI of $69,000 or more ($138,000 or more if married filing jointly). If your MAGI is within the phase-out range, you may qualify for a reduced credit.

Tax-free 529 withdrawals

Saving for college with a 529 plan provides various federal and state tax benefits.

First, while you won’t get a federal tax break for 529 plan contributions, many states provide a tax deduction or tax credit if you contribute to an in-state plan.

Secondly, the earnings generated by the account aren’t subject to federal income taxes, which allows your money to grow tax-free.

Finally, as long as you use any withdrawals from the plan to pay for qualified education expenses, your distributions aren’t subject to federal or state income taxes. Qualified education expenses generally include:

• Tuition and fees
• Books, supplies, and equipment
• Special-needs expenses
• Room and board (as long as you’re enrolled at least half-time)
• A computer, software, and internet access

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