Working with Tax Deductions for Student Loans

Get a Break on Your Tax Return

Working with Tax Deductions for Student Loans

Get a Break on Your Tax Return

Scholarships and grants are prime resources for college, because the money is not paid back.  When gift aid doesn’t quite rise to the level of need, loans are a go-to source of additional higher education  financing.  Low-interest Federal Government options, issued by the William D. Ford Federal Direct Loan Program, provide the most favorable terms for student-borrowers. Supplemental, alternative loans are available from private lenders, as well as parental options that let parents borrow directly for their childrens’ education.

If you have outstanding studnet loans, streamlining them is facilitated by a Federal Consolidation program that places your entire college debt under a single repayment umbrella.  Lower interest-rates and structured, income-based repayment options are consolidation benefits, which make it easier for cash-strapped graduates to manage higher education debt.  Regardless of the types of loans you have, or your payment obligations, there is good news: You can save money on your income taxes when you know how to leverage your student loans properly.

loan taxes

Tax Relief

Tax relief for higher education comes in three basic forms:

  1. Tax Credits – Reduce the amount of tax you pay
  2. Income Tax Deductions – Reduce the amount of your income that is subject to income tax
  3. Educational Savings Plans – Allow tax-free interest accrual and other benefits

Educational Tax Credits

Use the Hope Credit (sometimes called the Hope Tax Credit) and the Lifetime Learning Credit as tax saving tools. Depending on your income and tuition, you may qualify to claim one of these credits for each student you claim in a tax return. Hope credits generally apply to education that was undertaken in tax years 2008 and earlier – before the code was revised. Students that live within the Gulf Opportunity Zone (GO Zone) may qualify for even deeper credits.

  • Claim the Hope Credit for a student that is a freshman or sophomore in a degree program, who is attending at least half time. Claims are limited to two years per student. Maximum claim is $1,650.
  • Use the Lifetime Learning Credit to claim deductions for students that are taking any number of courses, not necessarily toward  degrees.  The key, is that the course work associated with the credit claim must be intended to advance the student’s career status. Maximum claim may be $2,000.

IRS publication 970 provides current information about the allowable credits and Tax Benefits of Education.

The American Recovery and Reinvestment act of 2009 provides income tax relief for education, in the form of American Opportunity Credits.  the Act expanded the scope of the benefit, and made changes to the way tax relief is administered.  After 2009:  Higher incomes qualify, course materials and books qualify for tax offsets, and the credits can be used for as many as four years of higher education, rather than two years.

What You Need to Know About the Tuition and Fees Deduction

IRS Publication 970 outlines some of the current criteria for filing a tax return with attached deductions for educational loan interest. Not everyone qualifies. Here are the basic requirements you must satisfy to be eligible to deduct the interest from your student loans on your income taxes.  (NOTE:  Tuition and Fees Tax Deductions policies change frequently, always consult IRS resources for up-to-the-minute information, before counting on tax relief for education):

  • You  are a student claiming your own deductions, the parent or guardian of a student, or the spouse of a student.
  • You are eligible for certain deductions depending upon your modified adjustable gross income (MAGI), filed singly or jointly.
  • You are ineligible for deductions when your MAGI is above a particular income level.

You must have used your student loan(s) solely for educational expenses in order to qualify, often called “qualified student loans.” Make sure you adhere to the IRS’ definition of a student: The student for whom you are itemizing interest deductions must be yourself, a spouse or one of your children (a dependent) and must be participating in a college program at least half-time.

Types of Deductible Interest

Student loan interest comes attached to a few types of educational loans, all of which qualify for deductions:

IRS form 8917 provides further details about who qualifies for deductions, which can only be taken for qualified educational expenses.  In recent years, the income threshold for deductions is around $75,000-$80,000.  Applied to their fullest extent, educational tax deductions can reduce the amount of income subject to tax by as much as $4000 for each qualified taxpayer.