Student Loans and Taxes

There Are Tax Advantages to Student Loans and Educational Expenses

Although education is expensive and re-paying student loans can be a burden, there are tax incentives that can ease the pain somewhat while you are in college and after you have graduated. The benefits take these forms:

  • Deductible interest, and
  • Tax Credits.

Student Loan Interest Deduction

Taxpayers can deduct up to $4,000 of interest paid yearly on student loans. These include:

  • Interest on student loans,
  • Interest on loan consolidations, and
  • Interest on lines of credit used to pay for educational expenses.

To qualify you must have used the proceeds of the loan towards qualified higher education expenses, such as tuition, fees, room, board, books and other related expenses incurred by you, your spouse or a dependent. This deduction takes a nice little chunk out of your taxable income!

Tax Credits and other Deductions

While you are in school there are some ways the tax code can make it a little easier to pay for college.

  • You may be able to deduct qualified tuition and fees that you pay for yourself, your spouse or a dependent. IRS Publication 970, Tax Benefits for Education,  outlines which expenses are qualified for deduction. The student must have been in a college program at least half-time.
  • You may be able to claim a Hope Tax Credit for part of the tuition and fees paid for a student who is a freshman or sophomore. You can claim the credit if you paid qualified tuition and fees during those years for you, your spouse or a dependent and your modified adjusted gross income is below a certain dollar amount.
  • The American Opportunity Tax Credit makes the Hope credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax.
  • You may be able to use the Lifetime Learning Credit to claim deductions for a student that is taking courses that may not necessarily lead to a degree. The only course requirement is that the course work must be intended to advance the student’s career. This credit can be used for undergraduate, graduate and professional degree courses.

Students and parents should use IRS Publication 970 as guides to these educational tax credits.