Is a Student Loan Considered Taxable Income?
Unravel the tax treatment of student loans and their broader financial impact, clarifying when they're taxable and how they affect your finances.
A student loan represents money borrowed from a lender, such as the federal government or a private institution, specifically to cover educational expenses. These expenses typically include tuition, fees, books, supplies, and living costs while attending an eligible educational institution. Understanding how these funds are treated for tax and financial purposes is important for borrowers.
Why Student Loans Are Not Taxable Income
Student loans are generally not considered taxable income by the Internal Revenue Service (IRS). This is because a student loan is a debt obligation that must be repaid, rather than an earned gain or an increase in wealth. When you receive student loan funds, you are incurring a liability, not generating income. This principle applies to both federal and private student loans used for qualified education expenses.
This treatment distinguishes student loans from other financial inflows, such as wages from employment or investment returns, which are considered taxable income because they represent earnings. The core difference lies in the repayment requirement; since the borrowed principal must be paid back to the lender, it is not viewed as an accession to wealth that would typically be subject to income tax.
When Student Loan Forgiveness Becomes Taxable
While the principal amount of a student loan is not taxable income, the forgiveness or cancellation of that debt often is, unless a specific exception applies. When a lender forgives a loan, the IRS generally treats the forgiven amount as if you received income, because you no longer have to repay a debt that was previously owed. This can result in a tax liability for the borrower in the year the debt is forgiven.
Important exceptions to this rule exist. Loan amounts forgiven under the Public Service Loan Forgiveness (PSLF) program are not considered taxable income at the federal level. Forgiveness received through the Teacher Loan Forgiveness program is also federally tax-exempt. Student loan discharges due to death or total and permanent disability have been federally tax-free through December 31, 2025.
A temporary federal exclusion was enacted by the American Rescue Plan Act of 2021, making all federal student loan forgiveness tax-free through December 31, 2025. This provision covers various types of forgiveness, including remaining balances on income-driven repayment (IDR) plans. After this date, unless extended by Congress, forgiveness under IDR plans will generally revert to being taxable income. Borrowers may also exclude forgiven debt from income if they are insolvent, meaning their total liabilities exceed their total assets, by filing IRS Form 982.
While federal tax law may exempt certain types of student loan forgiveness, some individual states may still consider the forgiven amount taxable income for state income tax purposes. Borrowers should verify their state’s specific tax laws regarding student loan forgiveness.
Student Loans and Financial Aid Eligibility
Student loans play a role in a student’s overall financial picture when determining eligibility for financial aid, although they are not treated as income in the same way wages are. When completing the Free Application for Federal Student Aid (FAFSA), the funds received from student loans are not reported as income. This is because the FAFSA primarily assesses a family’s ability to contribute to college costs based on income and assets, not borrowed funds that must be repaid.
While student loans are not counted as income on the FAFSA, borrowing affects a student’s financial resources. The amount of student loans accepted becomes part of their financial aid package, which is designed to cover the gap between the cost of attendance and the family’s expected contribution. The use of student loans directly impacts the total aid received and the amount of debt accumulated.
Tax Deductions for Student Loan Interest
While the student loan principal is not taxable income, the interest paid on qualified student loans can provide a tax benefit through the student loan interest deduction. This deduction allows eligible taxpayers to reduce their taxable income by the amount of interest paid, up to a maximum of $2,500 per year. This is an “above-the-line” deduction, meaning it reduces your adjusted gross income (AGI) and can be claimed without itemizing deductions.
To qualify for this deduction, the interest must have been paid on a loan taken out solely for qualified higher education expenses for yourself, your spouse, or a dependent. You must be legally obligated to pay the interest, and your tax filing status cannot be married filing separately. The deduction amount is subject to income limitations based on your modified adjusted gross income (MAGI); for example, for single filers in 2024, the deduction begins to phase out at a MAGI of $80,000 and is eliminated at $95,000.
If you paid $600 or more in student loan interest, your loan servicer typically sends you Form 1098-E, which reports the amount of interest paid. Even if you paid less than $600, you can still claim the deduction by obtaining the exact amount from your servicer. This deduction helps to offset the cost of borrowing for education by reducing taxable income.