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Guide to Filing Taxes With Student Loans

Student loans aren't taxable income, but if you took out or repaid them in the past year, your loans can have an impact on how you file taxes.
Feb. 28, 2019
Loans, Student Loans
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When filing taxes with student loans, remember this one important thing: Don’t report your loans as income. Student loans aren’t taxable because you’ll eventually repay them.

If you took out or repaid student loans in the past year, it can affect your taxes in other ways. Here’s what you need to know:

How to choose your tax filing status

With student loans, your tax filing status will mainly affect your income-driven repayment plan, if you have one. Income-driven repayment plans use the adjusted gross income listed on your taxes to determine your monthly payments.

» MORE: Calculate your payments under an income-driven repayment plan

If you file as single or head of household, your payments will be based on your income alone. If you’re married, your payments may increase or decrease based on the tax filing status you choose.

All income-driven repayment plans besides Revised Pay as You Earn, or REPAYE, will consider only your income to calculate payments. REPAYE includes your spouse’s income whether you file jointly or not.

For example, let’s say you earned $35,000 last year. Under the income-based repayment plan, which can cap payments to 10% of your discretionary income, your monthly payment would be $80 based on a family size of two if you filed separately.

You will pay more than if you filed separately because payments will be based on two incomes instead of one.

Consider the previous example in which you earned $35,000. If your spouse made $60,000 and you filed jointly, your payment would increase from $80 to $580 based on your combined income of $95,000.

This changes the equation, as the Department of Education will account for your spouse’s federal student loan debt when calculating your payment. Its math doesn’t factor in private student loan debt, though.

In our example, let’s say you and your spouse each owe $30,000 in federal student loans. Since you have equal levels of debt, the Department of Education would split that $580 payment in half. Now, you would pay $290 each month. If you owed $50,000 instead, your payment would increase to $362.50 to reflect the larger percentage of the combined debt you have.


» MORE: Will filing separately lower your tax bill?

Choosing a filing status is easy if you’re enrolled in REPAYE, which is open to any borrower with eligible federal student loans. It treats filing jointly and separately the same. If you qualify for a different income-driven repayment plan, you’ll want to look at your financial situation to decide.

Filing separately could save you money in student loan payments each month, but it may not make up for a smaller tax refund. Married couples who file jointly are eligible for a standard deduction of $24,000, compared with $12,000 for those who file separately. Filing separately also disqualifies you for certain tax breaks, including the student loan interest deduction and education credits.

How to qualify for education tax credits

If you took out student loans, you might qualify for the American opportunity credit or another education tax credit. Your school will send you Form 1098-T, a tuition statement, to help you track qualified tuition and expense payments.

How to deduct student loan interest

If you repaid student loans last year, you may be able to deduct any interest you paid. If your interest payment was over $600, your student loan servicer will automatically send you Form 1098-E, a student loan interest statement. You can still deduct interest if you paid less than $600, but you’ll need to contact your servicer to receive the form or access your online account to find the exact amount.

Should you refinance your student loans?

How student loan forgiveness affects your taxes

If your federal student loans are forgiven under an income-driven repayment plan, the forgiven amount is considered income and could lead to a hefty tax bill.

For example, let’s say you’re single with no dependents and earned $50,000 last year. Claiming the standard deduction, you would owe $4,369 in taxes. Add $50,000 in forgiven student loans to that income and your tax burden increases to $15,409.

Not all forgiven student loans are considered taxable income. You don’t have to include forgiven loan amounts on your taxes in the following situations:

  • Qualifying employment. Amounts forgiven through Public Service Loan Forgiveness, Teacher Loan Forgiveness and similar programs aren’t taxable.
  • Death or a total and permanent disability. This applies to you or the student benefitting from the loan, in the case of parent PLUS loans.
  • Other federal student loan discharge. Examples include your school closing or if there was fraud.

If you have a forgiven student loan to document when filing taxes, you should receive a cancellation of debt form, known as Form 1099-C.

When to talk to a tax professional

As with most tax-related topics, if your student loan situation seems complex, it’s time to discuss your options with a professional. They can help you determine which combination of filing status, tax deductions and credits will save you the most money now and in the future.

» MORE: How to stop student loan tax refund garnishment

You also may want to talk to a tax professional if you can’t afford your tax bill after student loan forgiveness. They may be able to help you reduce or avoid those charges, especially if it means your total liabilities are now more than your total assets.