Do You Have to Claim Student Loans on Taxes?

Many students and graduates in the United States grapple with student loans, a significant factor in their financial landscape. Understanding how these loans affect taxes is essential for financial planning. As tax season approaches, knowing what aspects of student loans to report on your tax return can lead to savings or prevent unexpected liabilities.

Interest vs. Principal on Returns

When managing student loans, it’s crucial to distinguish between interest and the principal amount. The principal, the original amount borrowed, does not impact tax filings. However, interest paid on student loans can be deducted under IRC Section 221. Borrowers may deduct up to $2,500 of student loan interest paid during the tax year if they meet income thresholds. This deduction reduces taxable income even for those not itemizing deductions.

For single filers, the deduction begins to phase out with a modified adjusted gross income (MAGI) above $75,000 and ends at $90,000. For married couples filing jointly, the phase-out starts at $150,000 and ends at $180,000. Since these thresholds are adjusted annually, confirm the limits each tax season.

Deductible Student Loan Interest

This deduction helps borrowers offset some of the financial strain of education debt. To qualify, the loan must have been used exclusively for qualified education expenses, such as tuition, fees, room and board, and necessary supplies, for the taxpayer, their spouse, or a dependent. Personal loans or loans from relatives are not eligible. Additionally, the borrower must be legally obligated to pay the interest on the loan, excluding loans where they are merely a co-signer.

For the 2024 tax year, single filers with a MAGI above $80,000 will see a phased reduction, with the deduction phasing out completely at $95,000. For joint filers, the phase-out begins at $160,000 and ends at $190,000. Staying aware of these thresholds is key, as they determine eligibility and the deduction amount.

When Forgiveness or Cancellation Is Taxed

Student loan forgiveness or cancellation can have tax implications. Under current tax law, forgiven student loan amounts are generally considered taxable income unless specific exclusions apply. The American Rescue Plan Act of 2021 temporarily made federal student loan forgiveness tax-free through 2025, including programs like Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) plans. Borrowers should monitor any changes in tax legislation that could affect this provision.

If forgiveness is taxable, the forgiven amount is added to gross income, potentially pushing taxpayers into a higher tax bracket and resulting in a larger tax bill. Borrowers should also check for state-level taxes, as some states may not align with federal exemptions. Consulting a tax advisor can help borrowers plan for and address these tax implications.

Documentation and Filing Steps

Accurate documentation is critical when addressing the tax implications of student loans. Borrowers should obtain Form 1098-E, which reports the total interest paid on student loans during the year. Loan servicers provide this form if at least $600 in interest was paid. Verify its accuracy against personal payment records to avoid discrepancies.

Include the information from Form 1098-E on your tax return. Tax software often simplifies this process, but understanding the manual steps is helpful. The student loan interest deduction is recorded on Schedule 1 of IRS Form 1040 and then carried to line 10 of the 1040 form. Accuracy is essential, as errors can prompt IRS inquiries or penalties.