Student Loans and Taxes: Some Basics to Know

There are still a few things you need to be aware of about student loans and taxes, even though the federal student loan suspension has been extended and student loan cancellation for some borrowers has been announced. Continue reading to learn more...

September 8, 2022

Student Loans and Taxes: Some Basics to Know

There are still a few things you need to be aware of about student loans and taxes, even though the federal student loan suspension has been extended and student loan cancellation for some borrowers has been announced.

Student loan debt cancellation is an option now, and payments and interest on student loans are suspended until the end of 2022. You will have to start making payments again in 2023 if the loan cancellation does not pay off your remaining student loan balance. For this reason, it's a good idea to review some fundamental concepts related to taxes and student loans.

Are Student Loans Considered Income?

No they are not. A common question about student loan debt is whether or not a student loan counts as taxable income. The IRS doesn't count student loans as income, which is good news.

Salaries and wages make up most of the income that is taxed. The IRS also taxes income that isn't earned, like winnings or profits from the sale of assets or stocks. So, because student loans are debts that need to be paid back with interest, they are not taxable income and do not need to be reported as such on your tax return.

Is the Student Loan Interest Deductible?

One thing to know about student loans and taxes is that you might be able to deduct the interest you pay on your loan from your taxes. At tax time, that deduction could save you a little money.

Right now, payments and interest on student loans are on hold until the end of December. This is because of President Biden's recent announcement and aid for the pandemic. But normally, when you pay interest, the IRS lets you deduct either the amount of interest you paid in a given tax year or $2,500, whichever is less. And you don't have to list your deductions item by item to get credit for student loan interest because the IRS considers it an adjustment to your income.

You must have paid interest on what the IRS refers to as a "qualified student loan" in order to be eligible for the student loan interest deduction. In essence, you, your spouse, or a dependent borrowed money to cover the cost of higher education. However, there are additional considerations, such as your filing status and income, that may affect your ability to deduct student loan interest. This is partially due to the fact that the student loan interest deduction phases out based on your modified AGI.

For instance, you and your spouse cannot be listed as dependents on another person's tax returns if you are married and want to claim the student loan interest deduction. You also cannot file separately in this situation. Additionally, your modified adjusted gross income must not exceed a certain threshold. You may deduct the amount you paid or $2,500 in 2022 if your modified adjusted gross income is less than $70,000 (if you're single) or $145,000 (if you're married filing jointly).

However, the student loan interest deduction would be lowered for single filers with a modified adjusted gross income between $70,000 and $85,000 or for married filers with a modified adjusted gross income between $145,000 and $175,000 instead. This is as a result of their greater modified adjusted incomes.

On the IRS website, you can get more details on the student loan interest deduction.

Is the 2022 Student Loan Forgiveness Non-Taxable?

It is, for now. Some people questioned whether President Biden's student loan cancellation would be taxable, even though it's crucial to understand whether student loans are considered income and whether you may deduct student loan interest on your taxes. That's because it was difficult to determine if you were taxed on the amount of your federal student loan that was forgiven, in part due to the variety of student loan programs and repayment schemes.

However, the IRS often considers cancelled and forgiven debt to be taxable income. Nevertheless, there are several significant exceptions to this that have lately been made with regard to student loans, largely as a result of laws enacted during the COVID-19 epidemic. In the Public Service Loan Forgiveness program, for instance, borrowers of student loans are currently excluded from paying taxes on the forgiven sums. 

From 2021 to 2025, taxes on student loan forgiveness were suspended under the American Rescue Plan Act (ARPA). That includes individuals whose student loans fall under the scheme for income-driven repayment. The broad relief provided by ARPA extends to other repayment plans as well, thus rendering student loan forgiveness nontaxable for the majority of debtors.

The Department of Education would offer borrowers whose loans are held by the Department of Education and whose income is less than $125,000 per year student loan relief up to $10,000 under President Biden's student loan cancellation plan, which was announced August 24. (For married couples filing jointly, the income threshold is $250,000). For recipients of Pell Grants, loan forgiveness of up to $20,000 is also possible. Payments on student loans will start up again in January 2023.

The White House also declared that the 2022 student loan cancellation amounts will not be considered taxable income as a result of the loan forgiveness provisions in ARPA. Therefore, the amount of your student loan that is forgiven as a result of this cancellation scheme shouldn't be subject to taxation.

Employer Repayment Assistance Could Be Taxable 

Congress passed the CARES Act, which included provisions allowing companies to contribute money toward their employees' federal or private student debts, in response to the pandemic in 2020. Employers might make a direct tax-free $5,250 annual contribution to employee student loan debt under CARES. Through 2025, employers will still be able to receive this student loan repayment aid.

If your company provides this benefit, it is now a tax-free option for you to pay down your student loan debt. Employer repayment help for your student loans may or may not be taxable to you after 2025, when the tax relief is scheduled to expire, because it is a type of debt forgiveness.

Tax Issues If You Repay Your Student Loan Late

According to data, one-third of borrowers had previously missed student loan payments, some of them more than once. However, many borrowers who defaulted on their debts in the last few years were able to have their good credit restored because of the recent epidemic relief. But it is difficult to predict whether the so-called "new start" student loan relief will result in fewer defaults given the current high inflation and impending recession.

Before default relief was implemented, default-related penalties for student loans may be severe and include things like severe damage to your credit score and wage garnishment. Your federal student loan default would have severe tax repercussions. Even though student loan payments are currently paused through December 31, 2022, if you think that you might default on your federal student loan, reach out to the Department of Education or your loan servicer to find out about any available loan rehabilitation program.

Tax Forms with Student Loans

When you have a student loan, the interest you pay on it is reported to you on Form 1098-E if you paid at least $600 in interest during the tax year. You probably didn’t pay interest recently because of the pause on student loan interest and payments. 

- Form 1098-E is typically sent to you, but you can also access a copy online or by getting in touch with your loan servicer. To obtain the student loan interest deduction, you utilize the data on the form.

- Form 1098-T, which displays the sum of eligible tuition and related education expenditures that you paid during the tax year, is another tax document that may be connected to your student loans. When claiming college tax credits that could lower your tax liability, Form 1098-T can be helpful.

Hopefully, you found this information to be beneficial! If you have any questions, please feel free to reach out here. We are always here to help!

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