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3 ways student loans can affect your taxes

Most people will save, but forgiveness and default could end up costing you.

Updated

Fact checked
For most borrowers, student loans can help you save on your taxes. But in a few cases, how you file your taxes and the way you repay your student loans could end up costing you.

Here are three ways student loans can affect your taxes — and how you can avoid paying more.

1. You can deduct student loan interest payments.

You could deduct up to $2,500 in student loan interest payments on your income taxes each year. Say you have a $60,000 salary. You would pay taxes as if you made $57,500 after the deduction.

How much you can deduct depends on a few factors:

  • How much you paid in interest. You must pay at least $600 in interest to qualify for this deduction. And you can’t deduct more than $2,500, even if you paid a higher amount in interest that year.
  • Your income. For the 2019 tax year, you’re only eligible for the full deduction if you make less than $70,000 a year — or less than $140,000 if you’re married and filing taxes jointly. Earn more than $85,000 — or $170,000 if married and filing jointly? You aren’t eligible for a deduction at all. If you fall in between these salary ranges, you might qualify for a reduced deduction.

Your servicer should send you a form in January telling you how much interest you’ve paid during the previous tax year and how much you’re eligible to deduct.

How to calculate your student loan tax deduction

How you file taxes affects your eligibility

If you’re married but file taxes separately, you can’t qualify for the student loan interest deduction. You also can’t get the deduction if someone claims you as a dependent on their taxes. In that case, the person who claims you as a dependent can deduct your student loan interest payments from their taxes.

2. You might have to pay income taxes on forgiven student debt.

The IRS generally considers any canceled debt to be taxable income, including some types of student loan forgiveness. This mainly applies to:

  • Forgiveness through an income-driven repayment plan
  • Negotiating down your private student loan balance
  • Private forgiveness programs, such as those offered through your employer

Depending on your income and the amount forgiven, this could send you into a higher tax bracket. This means you’ll also pay taxes on a higher percentage of your income.

Exceptions to paying taxes on forgiven student debt

The IRS generally doesn’t consider debt forgiveness in exchange for working a particular job or for a specific employer to be taxable income. Forgiveness through programs that require healthcare providers to work in a specific geographical area are also exempt.

Some popular forgiveness programs that aren’t taxed include:

  • Public Service Loan Forgiveness (PSLF)
  • Teacher Loan Forgiveness
  • National Health Service Corps Loan Repayment Program

You also don’t have to pay taxes if you qualify for total and permanent disability discharge. And loans forgiven due to the death of the borrower aren’t taxable either.

3. You might not get your tax refund if you default.

The government can garnish your tax refund if you default on your student loans — meaning you won’t receive a tax refund for that year. Your federal loans go into default after 270 days of nonpayment. Private loans often go into default earlier, sometimes as soon as 60 to 90 days after you miss a repayment.

If the government is going to garnish your tax refund, you should receive a tax offset letter that explains how much it’s withholding and who to call if you have questions. You could get the tax offset canceled if you’re facing financial hardship or going through bankruptcy proceedings.

How to avoid a student loan tax offset

How taxes can affect student loan costs

The way you file your taxes can also affect how much you pay for federal student loans if you’re on an income-driven repayment plan. With some plans, filing jointly as a married couple means the Department of Education will consider both your and your spouse’s incomes when calculating your monthly repayments.

But before you decide to file separately, consider the drawbacks first. You won’t be eligible for the student loan interest tax deduction, you’ll likely pay a higher tax rate and you might not be eligible for as many claims or tax credits. Make sure the difference in income-driven repayments is worth it before you make a decision.

Compare your student loan options

Data indicated here is updated regularly
Name Product Min. Credit Score Max. Loan Amount APR
Ascent private student loans
540
$200,000
2.71% to 12.99%
EDvestinU Private Student Loans
675
$200,000
4.07% to 9%
Straightforward student loans for undergraduate and graduate students.
LendKey Private Student Loans
Varies by lender
4.99% to 11.06%
This connection service partners with Sallie Mae and WSFS Bank to offer competitive rates.
 Advantage Education Loan Refinance Loan
670
Starting at 3.74%
Refinance to a more flexible repayment plan with this nonprofit lender.
Alliant Credit Union Traditional Student Loan
680
$60,000
Starting at 4.56%
All-purpose personal loans from @pl_product_min_loan_amount@ to @pl_product_max_loan_amount@ with rates that stop at @pl_product_var_rate@.
ChangEd student loan payment app
Securely connect all of your student loans and bank accounts to one place for a painless repayment experience.
Chicago student loans
None
Cost of attendance, up to $50,000
7.53% to 8.85%
No cosigner needed for this fixed-rate financing option.
Citizens Bank Private Student Loans
700
$295,000
1.25% to 10.57%
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Compare up to 4 providers

Bottom line

The student loan interest tax deduction is the main way student loans affect taxes for most borrowers. But if you’re considering forgiveness or default on your loan, it could end up costing you more. Married couples should also pay attention to how their tax filing status affect their student loan repayments and ability to take deductions.

You can learn more about how it all works by checking out our guide to student loans.

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