Tax deductions for student loans and other tax breaks

Take advantage of your student loan tax deductions and benefits

It’s no surprise that people usually don’t look forward to preparing their tax return. But If you’re an undergraduate or grad student, a professional taking degree courses, or a parent who is helping your child with tuition, you may be eligible for higher education tax credits and deductions (also called student loan interest deductions and tax credits).

Available student loan interest deductions and tax credits

Tax credits reduce the amount of taxes you owe, while tax deductions reduce the amount of income on which you are taxed. Here are the main education tax credits and benefits available for families:^{footnote 1}

• The American Opportunity Tax Credit (AOTC): If you’re a student enrolled at least half-time in a program leading to a degree or other recognized educational credential, you may be eligible for a credit of up to $2,500 per year. This tax credit is for tuition, enrollment fees, and course material expenses during your first four years of higher education.
• The Lifetime Learning Credit (LLC): This credit covers up to $2,000 per year in expenses related to all years of post-secondary education, as well as non-degree courses to acquire or improve job skills. There is no limit on the number of years it may be claimed.
• Student Loan Interest Deduction: If you have federal or private student loans, you may be eligible to deduct up to $2,500 of interest as an adjustment to your taxable income. The student must be enrolled at least half-time in a program leading to a degree or other recognized educational credential.
• Tuition waivers for graduate students: Grad students with qualified tuition reductions do not have to report the value of the reduction as taxable income. Tuition waivers may be taxable above a certain limit and not all employment types qualify, so consult with your school to see if your waiver is reportable as income.
  

Pro Tip: You can claim either the American Opportunity Tax Credit or the Lifetime Learning Credit in one tax year, but not both.

These expenses don’t qualify

According to the IRS, these expenses do NOT qualify for AOTC or LLC (See above):

• Room and board
• Insurance
• Medical expenses (including student health fees)
• Transportation
• Similar personal, living, or family expenses

Questions to ask before you file your taxes

Before you dive into the nitty-gritty of tax prep, there are a few questions to answer first:

• Is your student loan eligible? Not all student loans are eligible for all higher education tax deductions, so you’ll need to determine if your loan qualifies. The Internal Revenue Service provides the eligible loan criteria for claiming a tax deduction on their website, but you may also want to consult with a tax professional to find out more about what tax benefit/credits are available to you.
• Who can claim the tax credit or deduction? Determining who claims a tax credit or benefit is a family decision.
  • If you're a student: If you, your spouse, or a dependent you list on your tax return is the student, a tax credit can be claimed.
  • If you're legally obligated: A tax deduction can be claimed if you’re legally obligated to pay interest on the loan and if you (or your spouse, if filing jointly), can’t be claimed as a dependent on someone else’s return.

There are different criteria for tax credits and tax deductions, so make sure you check the IRS website or consult with a tax professional if you have questions.

Are you eligible for tax credits? It depends on your MAGI.

Whether or not you’re eligible to claim any of these tax credit programs depends on your modified adjusted gross income (MAGI). You can figure out your MAGI based on your federal tax form.^{footnote 2}

• The limits on your MAGI for either the AOC or the LLC are $90,000 if single; $180,000 if married filing jointly.
• For the Tuition and Fees Deduction, a single filer with a MAGI less than $80,000 and joint filers with a MAGI less than $160,000 may qualify for this deduction.

What forms will you need?

You’ll likely need Form 1098-E for your taxes:

• Only borrowers get this form; cosigners receive a tax information letter instead of the form.
• This form includes eligible interest payments received by December 31.

Servicers are required to issue a Form 1098-E if the interest the borrower paid in the tax year was $600 or more. For less than $600, go to your servicer’s website to check on the exact amount.