4 Ways Student Loans Impact Your Taxes

By Ashley Eneriz on 9 June 2016 0 comments

Tax time can make many feel anxious, especially if they're already burdened by student loan debt. Many people might not even think about their student loans when it comes time to file, and that would be a huge mistake.

Here are three big tax issues — and one huge tax benefit — you should be aware of if you have student loan debt.

You Can Deduct Loan Interest

Yes, you can deduct your student loan interest, reducing your income by up to $2,500. But to qualify for this deduction, you must earn less than $80,000 if single or $160,000 if you are filing jointly.

If you paid more than $600 in interest on your student loan, you should automatically receive a Form 1098-E in the mail. However, if you do not receive this, you can still claim the interest you paid. Just request this form from your lender in January. (See also: 15 Ways to Pay Back Student Loans Faster)

Defaulting on Your Loan Could Cost You Your Tax Refund

If you default on your federal student loan, your tax refund could go straight to your lender. They are legally allowed to take 100% of your tax refund. For most federal loans, you will be considered in default if you have not made a payment in 270 days.

Filing Jointly Can Cost You More in Student Loans

Many couples will file jointly to save money on their taxes and have easier access to tax credits, like the child tax credit and the dependent care credit. However, filing jointly can also make you pay more in student loan repayment throughout the year.

Many individuals pay for their student loans on an income-driven repayment plan, which calculates monthly payments based off earnings. Since your joint income will be significantly higher than your individual incomes, your loan payments are likely to be higher. To make smaller monthly payments on your loans, you should probably file separately.

You want to understand how much money it will cost to file your taxes separately versus how much you'll make in additional monthly student loan payments if you file jointly. MagnifyMoney.com put together a simple example scenario of a married couple without children. In their example, the couple would have saved over $1,100 in federal taxes if they filed jointly, but they would have saved $6,816 on their student loan payments by filing separately.

Student Loan Forgiveness/Cancellation Could Mean More Taxes

Student loan forgiveness programs are a great way to offset some of your student loan debt. However, some student loan forgiveness programs also come with a hefty tax bill in the end.

Student loan forgiveness programs such as the Public Service Loan Forgiveness (PSLF) and other plans for teachers, health professionals, lawyers, or volunteers are all tax-free. If you follow the programs' rules for loan forgiveness, your loan will be forgiven without tax repercussions.

Certain student loan forgiveness programs offered through individual states can be subjected to taxes. Many are not, but it is a good idea to do your research.

If your student loan is cancelled or discharged, it can be considered taxable income. It might be cancelled or discharged for one of the following reasons:

  • Cancellation for closed school;
     
  • Cancellation for False Certification of the loan;
     
  • Cancellation for unpaid refund of the loan;
     
  • Discharge for death or disability.

Finally, if you sign up for repayment programs that offer loan forgiveness after a certain number of years, any unpaid amount which is forgiven is considered taxable income. This usually happens with the income-based repayment (IBR) plans and the Pay As You Earn (PAYE) repayment plan. (See also: 5 Sobering Facts About Student Loan Debt)

Talk with a financial adviser that specializes in student loan debt for more help.

Do you write off your student loan interest on taxes?

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Guest's picture
Maricor Bunal

These 4 ways are actually helpful for students that still undergo with their student loan. For this, they might find this article useful. Thank you for sharing this post.