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Tax Consequences of Student Loans

For the last installment of the Student Loan Series, we’re going to be talking about the tax consequences of student loans. Previously we covered whether college is worth the cost, the different types of student loans, and repayment options.

There are several tax advantages of college students, and we’ll look at a few of them here:

Student Loan Interest:
The most common tax advantage of student loans comes in the form of student loan interest being tax deductible. You can write off up to $2,500 of annual student loan interest charges. This advantage phases out when your modified adjusted gross income (MAGI) is between $60,000 and $75,000 for single filers and between $120,000 and $150,000 for joint filers.

The $4,000 Deduction (or $2,000):
You may deduct up to $4,000 of college tuition and fees for anyone on your tax return. There is no need to itemize, but regardless of how many students are in your family, $4,000 is the annual maximum.

In order to qualify, your MAGI must be below $65,000 for single filers, $130,000 for joint filters. Single filers whose MAGI is between $65,001 and $80,000 and join filters whose MAGI is between $130,001 and $160,000 are entitled to a $2,000 reduction.

In addition, no deduction is allowed for a person who can be claimed as a dependent by someone else. You are not eligible if you are married and filing separately.

The American Opportunity Credit:
You may claim the first $2,000 of a college student’s annual tuition and fees plus 25% of the next $2,000 for a maximum of $2,500 per student. This credit can be claimed for four tax years for any student. The credit is phased out between AGI of $80,000 to $90,000 for single filers and between AGI of $160,000 and $180,000 for joint filers.

The Lifetime Learning Credit:
This is similar to the American Opportunity Tax Credit, but the number of years you can claim it is unlimited. The credit is 20% of tuition and fees up to $10,000, for a maximum annual credit of $2,000. The credit is phased out between AGI of $50,000 to $60,000 for single filers and between AGI of $100,000 and $120,000 for joint filers.

Tax-Free Employer Education Reimbursements:
If your employer reimburses you for classes you take, up to $5,250 of that income is tax free. This includes graduate-level courses. Dependents don’t count, but there are no maximum income limits.

With all of these deductions, your tax bill is now lowered by the amount of the deduction. Rather, your tax liability is lowered. So you pay taxes on less of your income. For example, someone making $55,000 per year and writing off $2,500 in student loan interest would now have a tax liability of $52,500. Assuming they are in the 25% tax bracket, they would be saving $625 ($2,500 x .25).

While these deductions will not cover even a significant portion of the student loans, they do make it a little easier to handle it all. I encourage everyone to look at these tax breaks and save a little money each year.

Readers, which student loan tax deductions are you taking advantage of?



  1. AS a new graduate, I really appreciate some of these credits. The lifetime learning credit really helps out. There’s another one called the Hope credit that helps as well. Here’s info on that one,,id=199791,00.html

    I will start taking advantage of some of these others as I enter loan repayment, such as writing off my interest. Heck, I may enroll for a second degree or Masters program in the next few months, and if I do, this info will come in handy!

    • @Jesse, Actually they just renamed the Hope Credit to the American Opportunity Credit because they made a few changes for 2009 and 2010 that expanded it. It’s nice to know that we can at least deduct SOME of the expenses, it’s like getting a slightly lower interest rate, which I definitely appreciate!

  2. Tax deductions are always nice, given that taxes are the single biggest lifetime expense. I took advantage of the tax credit when I had student loans a few years ago. Thanks for sharing.

  3. I enjoyed the interest, I mean the benefit of interest on student loans quite a bit this past tax season. I actually probably would have owed the Fed some money if it wasn’t for the interest I paid. Granted my return was still rather small, but that’s a lot better than owing!

  4. I just returned to school to update my skills. Thanks for the reminder of all the tax credits and deductions I may be able to take advantage of. Like many adult students, my family makes too much to qualify for grants and I prefer to pay cash the the balance of my education. The increase in the American Opportunity Credit looks like it will be very beneficial when I file my taxes next year. I have to pay up front for my classes but will get to reduce my taxable income next year. Sounds like a win for me.

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