Tax considerations should be front-of-mind when you’re paying off your student loan debt. Whether you have a standard repayment plan or you’ve signed up for an income-based repayment program, there are certain tax rules that affect student loan borrowers, including some tax breaks that can provide relief come tax-filing season. A financial advisor can help you figure out what to do with your taxes. Here are five important IRS rules that every student loan debt holder should know.
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Get Started Now1. Student Loan Interest Is Tax Deductible
If paying off your student loans is at the bottom of your priority list, the opportunity to claim the student loan interest deduction might be a good incentive to start making more than the minimum payment. For tax years 2024 and 2025, you can write off up to $2,500 of paid interest.
The student loan interest deduction is an above-the-line tax break that you can claim on Form 1040 or Form 1040A regardless of whether you itemize your deductions or take the standard deduction.
2. Filing Status Determines Who Can Claim the Tax Break
The bad news is that not everyone is eligible for the student loan interest deduction. There are income limits and phaseouts that vary depending on your filing status. And while there are good reasons for spouses to file their taxes separately in certain cases, spouses are not entitled to a tax write-off for their paid student loan interest if they submit two different tax returns.
However, this deduction begins to phase out for taxpayers in 2024 with modified adjusted gross income (MAGI) of more than $80,000 ($165,000 for joint filers). The deduction completely phases out for taxpayers with MAGI of $95,000 or more ($195,000 for joint filers).
For tax year 2025 (returns filed in 2026), the $2,500 tax deduction begins to phase out when a taxpayer’s MAGI reaches $85,000 ($170,000 for joint filers) and completely phases out for MAGI of $100,000 or higher ($200,000 for joint filers).
3. Your Filing Status Can Affect the Size of Your Debt Payments
Revised Pay As You Earn (REPAYE) is an income-based repayment plan that is available to folks with student loans. Anyone with a direct federal student loan can apply for the new payment program, which limits the monthly payment to 10% of a borrower’s income. Neither your income level nor the year that you first took out the loan matters when determining your eligibility for the program.
While REPAYE will be beneficial to millions of people saddled with student debt, married couples could see their monthly payments rise substantially. The rules say that it doesn’t matter whether couples file separately or jointly at tax time. Either way, the size of their monthly payments will depend on the incomes of both spouses combined.
In contrast, the other income-based repayment plans look at income separately for spouses who file separately. So if you qualify for the original PAYE payment plan, for example, you could possibly lower your monthly debt payments by filing separately from your spouse. Plus, the new SAVE (Saving on a Valuable Education) plan is now available from the government in an effort to curb how much people are paying in student loans.
4. Tax Credits for Education Expenses
Individuals repaying student loans or their families might qualify for education-related tax credits, such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). These credits aim to offset the expenses of higher education but cannot be used directly toward student loan payments. It’s helpful to understand the qualification requirements, particularly for those balancing loan repayment with ongoing education costs. For instance, the AOTC offers up to $2,500 per eligible student during the initial four years of post-secondary education.
5. Debt Relief Scholarships and Grants Can Be Taxable
For a scholarship or grant to be tax-free, you must use it to pay for education-related expenses that you need while you’re earning a degree. Certain programs and education-based nonprofits – such as Teach for America – offer awards that student loan borrowers can use to pay off some of their debt. Some of those awards and grants are taxable, as are debt relief scholarships for borrowers who are no longer in school.
Bottom Line
Whether you plan to pay off your student debt in 10 years or 20 years under an income-based repayment plan, it’s a good idea to keep in mind that your actions can affect your tax situation. Forgetting tax rules can cost you quite a bit when it’s time to submit your tax return. It’s important to work with a professional if you’re not sure whether you can handle it on your own.
College Savings Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
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