5 Tax Rules to Consider When Paying Off Student Loans

Paying off student loans can affect more than your monthly budget. Your interest payments may qualify for a federal tax deduction, your filing status can affect both that deduction and payments under certain income-driven repayment plans, and forgiven debt can sometimes create taxable income. Those rules have also changed considerably in recent years, making it especially important to understand which provisions apply in 2026. Here are five tax rules to keep in mind while repaying student loan debt.

A financial advisor can help you create a financial plan to pursue your goals.

1. Student Loan Interest Is Tax Deductible

If you pay interest on a qualified student loan, you may be able to deduct up to $2,500 of that interest from your taxable income. For 2026, the deduction is the lesser of $2,500 or the amount of qualifying student loan interest you actually paid during the year.

The student loan interest deduction is an adjustment to income, which means you do not have to itemize deductions to claim it. You generally must be legally obligated to repay the loan, the loan must have been used solely for qualified education expenses and neither you nor your spouse, if filing jointly, can be claimed as someone else’s dependent.

Interest paid for you through certain tax-free employer educational assistance programs generally cannot also be claimed for the student loan interest deduction.

2. Filing Status Determines Who Can Claim the Tax Break

Not everyone qualifies for the student loan interest deduction. Eligibility depends partly on your filing status and modified adjusted gross income.

For tax year 2026, the deduction begins to phase out when MAGI exceeds $85,000 for single filers, heads of household and qualifying surviving spouses, and it is eliminated at $100,000. ¹ For married couples filing jointly, the phaseout begins above $175,000 and the deduction is eliminated at $205,000.

Married taxpayers who file separately cannot claim the student loan interest deduction. That can become an important trade-off for couples considering separate returns to reduce payments under an income-driven student loan repayment plan.

3. Your Filing Status Can Affect the Size of Your Debt Payments

Federal income-driven repayment options changed significantly in 2026. The SAVE plan, which replaced REPAYE, ended following a federal court order in March 2026 and is no longer available. Borrowers enrolled in SAVE must choose another eligible repayment plan.

For borrowers whose federal loans were first disbursed before July 1, 2026, available income-driven plans can include Income-Based Repayment (IBR), Pay As You Earn (PAYE), Income-Contingent Repayment (ICR) and the new Repayment Assistance Plan (RAP), depending on the loan type and borrower. PAYE and ICR are scheduled to end no later than July 1, 2028.

For borrowers receiving a new federal student loan on or after July 1, 2026, RAP is generally the only income-driven repayment option. RAP bases payments on adjusted gross income and provides a reduction for qualifying dependents.

Tax filing status can affect the income used to calculate payments. Under most current income-driven plans, married borrowers filing jointly generally have payments based on their combined income, while borrowers filing separately generally have payments based only on their individual income. Filing separately may therefore reduce a student loan payment in some circumstances, but it can also increase a couple’s overall tax bill and eliminate tax benefits such as the student loan interest deduction.

4. Tax Credits for Education Expenses

Individuals who are currently paying qualified education expenses may qualify for the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). These credits apply to eligible education expenses paid during the tax year, not to payments made later on student loans that financed those expenses.

The AOTC provides a credit of up to $2,500 per eligible student for the first four years of higher education, with up to $1,000 potentially refundable. The LLC provides a credit of up to $2,000 per tax return and can apply to an unlimited number of years of higher education or qualifying courses used to acquire or improve job skills.

Beginning with tax year 2026, new identification rules also apply. To claim either credit, the taxpayer, or at least one spouse on a joint return, must generally have a work-eligible Social Security number issued by the filing deadline. A dependent student for whom the credit is claimed must also meet the applicable Social Security number requirement.

5. Debt Relief Scholarships and Grants Can Be Taxable

The tax treatment of forgiven student debt changed in 2026. A temporary federal provision that broadly excluded many student loan discharges from taxable income expired after December 31, 2025. As a result, debt forgiven through an income-driven repayment plan in 2026 or later can generally be treated as taxable cancellation-of-debt income unless another exclusion applies.

Public Service Loan Forgiveness is an important exception. Student loan debt forgiven through PSLF is not considered taxable income for federal purposes. Certain other programs can also receive favorable treatment, including qualifying National Health Service Corps and state health-professional loan repayment programs.

Scholarships and grants follow separate rules. A scholarship or grant can generally be tax-free when a degree candidate uses it for qualified expenses such as required tuition, fees, books and supplies. Amounts used for expenses such as room and board or received in exchange for certain services can be taxable.

Because federal and state rules can differ, borrowers expecting a substantial loan discharge should consider the potential tax consequences before the balance is forgiven.

How Is Student Loan Forgiveness Taxed in 2026?

The tax result depends on the forgiveness program. If a federal student loan balance is forgiven through an income-driven repayment plan in 2026 or later, the canceled amount is generally treated as taxable income for federal purposes unless another exception or exclusion applies. The temporary federal provision that excluded many types of student loan forgiveness from income applied only to qualifying discharges through December 31, 2025. ² A borrower with taxable forgiveness may receive Form 1099-C and generally must report the canceled debt on their federal income tax return.

Public Service Loan Forgiveness (PSLF) is different. Qualifying debt forgiven through PSLF is not treated as taxable income for federal purposes. Certain other student loan discharges and repayment-assistance programs can also qualify for tax-free treatment, including qualifying discharges resulting from death or total and permanent disability and certain health-professional repayment programs.

State tax treatment can differ from federal rules. Borrowers approaching forgiveness may therefore want to estimate both the federal and state tax consequences in advance, particularly when a large balance could be discharged.

Frequently Asked Questions

Bottom Line

Student loans can affect your taxes while you repay them and when a remaining balance is eventually forgiven. In 2026, eligible borrowers can still deduct up to $2,500 of qualifying student loan interest, but income and filing-status restrictions apply. Filing separately may also change payments under an income-driven repayment plan, potentially creating a trade-off between lower loan payments and a higher tax bill. The rules around forgiveness deserve particular attention. The temporary federal tax exclusion for many student loan discharges expired after 2025, meaning some IDR forgiveness can now create taxable income, while PSLF remains federally tax-free. Reviewing both your repayment plan and tax situation can help you avoid treating either decision in isolation.

College Savings Tips

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Consider using an income tax calculator to help you estimate how much you’ll pay in taxes.

Photo credit: ©iStock.com/Christopher Futcher, ©iStock.com/Tverdohlib, ©iStock.com/Christopher Futcher