6 Things Most People Don’t Know About Student Loans and Taxes
Student loans may be a financial burden, but the federal government offers some relief come tax time. If you’re one of the 40 million Americans with educational debt, you might be able to reduce your taxes by deducting interest paid on your student loans or even claim a tax credit for tuition paid for with borrowed money.
Yet many people with student loans aren’t aware of the tax benefits they’re entitled to, a recent survey conducted by YouGov on behalf of Student Loan Hero found. When more than 1,100 American adults were asked questions about the rules surrounding student loans and taxes, many were unsure about the difference between a tax credit and a deduction, weren’t aware the student loan tax benefits they could claim, and weren’t clear about the different rules for deducting student loan interest.
“Student loan borrowers may be blindly leaving money of the table when it comes to their taxes,” Andy Josuweit, CEO of Student Loan Hero, said in a statement. “Fortunately, borrowers still have time before taxes are due to learn their options and maximize the incentives available to them.”
If you have student loans, here are five things you should know in order to save money on your taxes.
1. Paying student loans can lower your taxes
The average person with student loans makes monthly payments of $242, or $2,904 per year, according to the Brookings Institution. If you took out a qualified student loan to cover education expenses and earn less than $80,000 ($160,000 if you’re filing jointly) you may be able to deduct up to $2,500 in interest paid on that loan.
The student loan interest deduction can save a taxpayer up to $625 a year, depending on their total income, amount of interest paid, and tax bracket. Yet 19% people surveyed by Student Loan Hero had no idea this tax perk even existed.
2. A tax deduction isn’t the same as a tax credit
Nearly half of people surveyed by Student Loan Hero were fuzzy on the distinction between a tax credit and a tax deduction. A tax credit lowers the amount of tax you owe, dollar-for-dollar, while a tax deduction reduces your taxable income, which in turn reduces your taxes.
The tax perk for student loan interest is a deduction, not a credit. If you paid $1,000 in student loan interest last year, you can subtract that amount from your total income, lowering your taxes by $250 if you’re in the 25% tax bracket. It’s not quite as sweet as cutting your tax bill by $1,000, but it’s still a pretty good deal.
3. You don’t have to itemize to deduct student loan interest
The student loan interest deduction is what is known as an “above-the-line” deduction, which means it’s subtracted from your earnings before your adjusted gross income is calculated. You don’t need to itemize to claim these deductions, which is good news for the majority of taxpayers who don’t file a Schedule A. Yet only 17% of respondents knew they could deduct interest paid on student loans even if they didn’t itemize.
4. You don’t have to make the student loan payments yourself to get a deduction
Let’s say your generous parents agree to help you cover your student loans for a few months while you’re out of work. Even though you didn’t make those payments yourself, you can still deduct any interest paid on your loan. Yet only 15% of people surveyed by Student Loan Hero realized they could claim the deduction for student loan interest payments made on their behalf.
5. You can get the deduction even if you don’t have a 1098-E
If you pay more than $600 in student loan interest in a year, your lender is required to send you a form 1098-E, which documents the interest you paid. But even if you don’t receive a 1098-E, you may still be able to deduct interest paid on eligible student loans. If you didn’t receive the form but think you might qualify for the deduction, contact your loan servicer to find out how much you paid in interest last year.
Twenty percent of people surveyed by Student Loan Hero thought you must have a 1098-E to claim the interest deduction and another 69% weren’t sure. Only 11% knew you could get the deduction even without the form.
6. You can get a tax credit for college expenses, even if you paid with a loan
Two tax credits, the American Opportunity Credit and the Lifetime Learning Credit, are available to help you offset the cost of higher education. If you paid tuition for yourself or a dependent this year, these credits can reduce your tax bill by up to $2,500. Even if you used student loans to pay your tuition, you can still claim the credit.