Getting student loans is an excellent way to finance your education. If you don’t have the money to pay for school, college, or higher education, student loans can open the door to educational opportunities. These same student loans often become a source of stress once you have a diploma in hand.
Most students have a question about student loans: are student loans taxable? The answer is actually a little complicated. Do not worry, we are here to help.
Are Student Loans Taxable? Student loans are not taxable. Student loans are considered to be a form of income, but they are not subject to taxation. This applies whether the loans are federal or private loans.
According to the Internal Revenue Service (IRS), if a student loan is forgiven as part of an agreement where the borrower works for a qualified employer and makes any required loan repayments, it will not be considered taxable income.
In most cases, student loans will be discharged at death or after 25 years of repayment, so they are tax-free.
Although student loans are not considered income, they can affect your tax filing.
In this post, we’ll take a look at the basics of student loan taxation, as well as some of the exceptions to the rule.
So, keep reading to learn more!
Are Student Loans Taxable?
The short answer is no. Student loans are not taxable income.
A student loan is a loan that is specifically intended to help students pay for their education. Student loans can be used to cover tuition and other educational expenses, and can often be obtained with very favorable terms, including low-interest rates and deferred repayment options.
You can use student loans to pay for tuition, room and board, books and supplies, transportation, and other expenses.
In general, there are two kinds of student loans: federal student loans and private student loans.
- Federal student loans: Federal student loans are provided by the government and typically have more favorable terms than private student loans. Federal student loans are available to students and their parents.
- Private student loans: Private student loans are available to creditworthy students and their co-signers. The loans are provided by banks, credit unions, and other lenders, and usually require a co-signer.
Student loans can be a great way to finance your education, but it’s important to understand all the terms and conditions before taking out a loan.
Federal or private student loans usually require the borrower to repay the full amount together with interest. Even if your college or university’s award letter calls these loans part of your “award,” they aren’t taxable income according to the IRS.
Generally speaking, student loans are not taxable, and most borrowers won’t have to worry about paying taxes on their loans.
However, it’s important to note that other forms of financial aid may be taxable. Usually, scholarships, grants, fellowship grants, and tuition reductions are tax-free as long as they comply with the following requirements:
- You’re working towards a degree at an eligible school.
- They don’t exceed your educational expenses.
- They aren’t designated for other purposes, like room and board.
- They don’t represent payment for a service, like teaching or researching.
Part of the money you receive from a scholarship, grant, or fellowship may be taxable if the amount you get is more than what you paid for tuition and related education expenses.
For example, if you get a $20,000 scholarship but your total tuition, fees, and course-related expenses are only $17,000, then the difference of $3,000 is taxable income.
In IRS Publication 970, you can find out more about the rules and exceptions for different types of financial aid.
Calculating Taxes On Student Loans
If your student loan is forgiven, you may have to pay taxes on the forgiven amount. This is because the IRS considers forgiven debt to be taxable income.
However, there are a few exceptions.
If you work for a qualified employer and make any required loan repayments, the forgiven debt will not be considered taxable income. In most cases, student loans will be discharged at death or after 25 years of repayment, so they are tax-free.
Even though student loans are not considered income, they can still affect your taxes. For example, if you’re claiming the American Opportunity Credit or the Lifetime Learning Credit, your eligible expenses will be reduced by any amounts you paid using student loans.
Additionally, if you’re claiming the Student Loan Interest Deduction, you can deduct up to $2,500 of the interest you paid on your student loans each year. To qualify, your modified adjusted gross income (MAGI) must be less than $80,000 ($170,000 if filing a joint return).
How To File Student Loans On Your Federal Taxes
You should receive a Form 1098-E from your student loan lenders or servicers in late January or early February the following year if you paid interest on a loan in the previous year. On this form, you can see how much interest you paid during the year. In addition, the loan servicer sends a copy of Form 1098-E to the IRS.
Keep in mind that the IRS rules only require a lender to send the form if it received $600 or more of interest during the year, so even if you paid eligible student loan interest during the year, you might not receive the Form 1098-E.
If you paid eligible student loan interest and didn’t get Form 1098-E, check your year-end statement or online account to see how much interest you paid so that you can figure out how much you can deduct.
If your student loan was forgiven, canceled, or discharged, you’ll need to report the amount as taxable income on your tax return. You will need to file a 1040 tax return if you have to pay taxes on forgiven student loan debt. You can do this by mail or electronically. Include the amount of forgiven debt in your taxable income and calculate your taxes due.
If you’re not sure how to file your taxes or calculate your taxes due, you can get help from a tax professional.
State Taxes On Student Loans
Some states treat student loan interest as taxable income, while others do not. The states offer their own student loan programs. These loans are usually offered through state-run colleges or universities, and the interest rates vary from state to state.
Some states have lower interest rates than the federal government, while others have higher interest rates. You’ll need to check with your state’s tax agency to see if you need to pay taxes on your student loan interest. Additionally, some states offer a deduction for student loan interest paid, so you may be able to lower your tax bill by taking advantage of this deduction.
Before you file your taxes, you should check with your state’s tax agency to see if student loan interest is taxable in your state.
Conclusion
Student loans can have a big impact on your taxes. Hopefully, this article has helped clear up any confusion you had about whether student loans are taxable. In most cases, they’re not considered income, but there are a few exceptions to this rule.
It’s important to understand the rules and regulations so you can correctly file your taxes and avoid any penalties. If you have any questions about how to file your taxes or calculate your taxes due, you should consult a tax professional.