How Student Loans Affect Your Taxes

How Student Loans Affect Your Taxes

For college students or parents of students, taking out a loan is often necessary, but intimidating. The financial implications of attending college can be hard to anticipate or understand. For student financial planning, it’s crucial to know how taking out a student loan can impact your taxes. Here’s a quick briefing on everything you need to know.

Bonus: A Beginner’s Guide to Tax Brackets

Free Money?

For starters, your government student loans do not count as taxable income, nor do awards like the Pell grant or state-sponsored grants. You won’t have to worry about paying taxes on that money when you file your tax return. Some of this is contingent on the money’s use. In other words, it’s only tax-free if you are using it for school supplies, not for extraneous expenses.

Give Us Some Credits…

There are also tax credits you may be eligible for if you or a dependent is currently in school. The American Opportunity Credit is valid for the student’s first four years of school, and the Lifetime Learning Credit is valid for any university or trade school education after that. When you file a tax return, make sure to find out if you’re eligible for these credits, as they can cover a large portion of your educational expenses every year.

Oh So Interesting

What about paying back student loans? How is that process impacted by tax law?

As students pay back their student loans, they can deduct up to $2500 worth of that interest from their taxable income each year. You can claim this deduction as long as you’re paying your student loans. Parents can claim this deduction, too, if they took out a loan on behalf of a dependent. The IRS has a lot of online resources that can help students determine eligibility for tax breaks in their college and post-college years.

Bonus: 3 Financial Tips for Traveling Abroad

And if you need expert help decoding student loans and the taxes that impact them, our expert team at Hacker Accounting is here to help. Give us a call at 602-375-5251 to get started.

Chris Hacker
Chris has been working in the bookkeeping and accounting field for over 15 years preparing business, income and payroll taxes. Chris has a bachelor’s degree from Arizona State and is an Enrolled Agent with the Internal Revenue Service.