This chapter will provide information about student loans as well as answer the most common tax questions students may have. Here you will learn about student loans and taxes, student loan tax deductions, and filing student tax returns. It will help you get a better understanding of how to report student expenses and loan interest on your tax returns.
Student Loans and Tax Questions
If you’re going back to school to pursue further education, you may be looking to apply for a student loan to help pay for tuition. This section will discuss how to apply for a student loan when going back to school, how to handle existing student loan debt, as well as provide information about taxes on your student loans.
Applying for a Student Loan When Going Back to School
Whether you’re a first-time college student or are going back to school for a second time, you may be eligible to apply for federal student loans through Federal Student Aid. Once you’ve determined your eligibility, you can apply for a loan through FAFSA (Free Application for Federal Student Aid). Note that this application process is free — you do not have to pay to fill out a FAFSA form, so beware of companies that try to defraud you during this process.
Going Back to School with Existing Student Loan Debt
Perhaps you’re considering returning to school with existing student loan debt. Your existing debt doesn’t have to be a barrier to pursuing further education.
Your eligibility for another student loan depends on the status of your current loan. If you haven’t defaulted on your loan, you may return to school at any time, provided you are not over-indebted. If your debts are high, you may not qualify for another federally guaranteed student loan. In that case, you may have to apply for a loan from a private financial institution, which most certainly will attract higher interest and less favorable repayment terms.
If your loan is in default, you should call your student loan lender and discuss amended repayment terms to get your loan out of default. When your current loan is back in good standing, you can apply for an additional student loan to pursue further studies.
You can also apply for a deferment on your federal student loan to reduce your monthly repayments or to stop payments for a period of time until you graduate. This will help to alleviate the financial stress and enable you to concentrate on your studies.
Taxes on Student Loan Forgiveness
Student loan forgiveness means that you are no longer liable to repay your loan. Students receiving loans from Federal Student Aid, sponsored by the U.S. Department of Education, may apply for this relief but will be granted student loan forgiveness only in certain circumstances. Such circumstances could include medical conditions that disqualify you from working.
If you qualified for federal student loan forgiveness under legislation prior to 2010, your repayment plan capped your payments at anything between 10 and 15 percent of your income per month, over a period of 20 to 25 years, after which your loan would have been forgiven. In July 2010, however, President Barack Obama enacted new federal loan programs under the Health Care and Education Reconciliation Act. This legislation made the following changes to federal student loan forgiveness:
Private lending institutions no longer receive subsidies from the government for federally backed loans.
From 2014, payments on new loans will be capped at 10 percent of income.
Students are eligible for forgiveness after 20 years instead of 25.
There is a catch, however. Any amount forgiven under a federal student loan forgiveness program is considered taxable income by the Internal Revenue Service (IRS). In other words, if after 20 years, $30,000 of your student loan is forgiven, it will be added to your taxable income for the calculation of your tax liability for that particular year. Your lender will send you a 1099-C form stating the amount of debt forgiven, and this must be filed with the IRS along with your income tax return.
Under current legislation, student loan forgiveness is not taxable under the following programs:
- Public service loan forgiveness
- Teacher loan forgiveness
- Law school loan repayment assistance programs
- National Health Service Corps Loan Repayment Program
Student Loan Interest Taxes
Student loans and taxes are an emotive issue with many people. The good news is that, under current tax legislation, students can deduct much of the interest paid on their loans come tax time. The IRS imposes the following rules for a tax credit:
- You can deduct up to $2,500 per year of the interest paid on your student loan.
- Married couples filing jointly may claim a maximum of $2,500, even if they both have student loans.
- Your modified adjusted gross income (MAGI) cannot be more than $80,000 per individual, or $160,000 for married couples filing jointly, to qualify for the tax credit.
You can claim for this student loan tax deduction only if your loan originated from a qualified source. Loans from your parents or from your employer do not qualify for this tax credit.
Student Tax Return Information
You may find that filing your tax return is an overwhelming or confusing process. Here, we attempt to avoid the confusion by providing insights into the forms used and the deductions that can be claimed on a student’s tax return.
Tax Benefits of Education and Going to College
To help offset the costs of tuition, such as tuition fees, books, supplies, and equipment, the IRS allows two tax credits to reduce your taxable income:
- The American Opportunity Credit, which enables you to claim up to $2,500 per student per year for the first four years of school.
- The Lifetime Learning Credit, which allows you to claim up to $2,000 per student per year to cover tuition and fees, books, supplies, and equipment.
If you contribute to a qualified tuition program (QTP), also known as a 529 plan, any money you withdraw from the account to pay for your education will not be taxed. QTPs are programs that are set up by a state or educational institution to enable you to prepay for education or as a savings plan for education-related expenses.
If you are a member of an IRA program, you may withdraw funds to pay higher education expenses for yourself or your immediate family. Although federal income tax will be liable on the amount withdrawn, you won’t be subject to an early withdrawal penalty.
How to Report and Deduct Interest Paid on Student Loans
You must use IRS Form 1098-E to report student loan interest repayments and file it along with your student tax return. This may make you eligible for a tax deduction on the interest paid on your loan during the year.
By law, the IRS requires federal loan service providers to report payments on a 1098-E form by January 31 for the preceding year but only if the interest on the loan exceeds $600 for that tax year. If you paid less than $600 in interest on your student loan, you might not receive a 1098-E and will need to contact your loan provider for the exact amount of interest paid. If you have loans from several loan providers, you need to receive a 1098-E from each of them to file with your tax return.
Don’t Let Student Loans and Tax Questions Stand in Your Way of Going Back to School
By now, you will have realized that understanding the ins and outs of student loans and taxes is not so difficult after all. You will have gained an insight into the student loan tax deductions you’re allowed to include in your tax return, which will ease your repayment burden. This should provide you with more encouragement to further your career. Students are being given great tax incentives to enroll for additional education in many fields.
Go on! Dare to take that first step and enroll in a study program that will change your life!
With the support of your friends, family and peers, and with guidance from trusted school counselors and enrollment advisors, you will be well prepared to take the first step and pursue a higher education. Would you like to learn more about how you can start the process of going back to school for a bachelor’s, master’s, or doctorate degree? Then look into your options and consider contacting an enrollment advisor today.