Student loans are among the most common sources of debt in America. It has been reported that about one in five Americans have student loan debt-totaling more than $1.7 trillion.
If you’re one of those people, you are probably waiting to hear whether—in these times of high tuition and inflation—some portion of your federal student loan will be forgiven or whether the federal government’s pause on student loan payments and interest will be extended. (Stay tuned: news on the student loan forgiveness front is expected soon from the Department of Education.
In the meantime, though, it may help to refresh your knowledge of some of the ways that having a federal student loan, can affect your taxes.
Student Loans Are Not Considered Income
A typical question surrounding student loan debt is whether a student loan is income for tax purposes. The fortunate answer is no, the IRS doesn’t consider student loans to be income.
Income that is taxable is usually made up of salary and wages. The IRS also considers unearned income (e.g., winnings or profits from sales of assets or stocks) to be taxable. So, because student loans are debts that are intended to be repaid with interest, they are not taxable income and do not need to be reported as such on your tax return.
You Can Sometimes Deduct Student Loan Interest
Additional good news about student loans and taxes is that you may be able to deduct the interest that you pay on your student loan on your tax return. That deduction can potentially save you a little money at tax time.
Right now, due to pandemic relief, payments and interest on student loans are on pause until the end of August. However, normally, when you pay interest, the IRS allows you to deduct either the amount of interest you paid during a given tax year, or $2,500, whichever is less. And, you don’t have to itemize your deductions to claim student loan interest because the IRS considers student loan interest to be an adjustment to your income.
To claim the student loan interest deduction, you must have paid interest on what the IRS calls a “qualified student loan.” That is essentially a loan that was taken out to pay for higher education expenses for you, your spouse, or a dependent.
But whether you can claim a deduction for student loan interest also depends on several other factors including on your filing status and income. That’s partly because the student loan interest deduction phases out depending on the amount of your modified adjusted gross income.
For example, if you …….