Everyone’s favorite time of year is almost upon us: tax season. And when you have student loan documents on top of your regular tax forms, the stress about potential errors can pile up. According to a 2017 United Way Worldwide survey, millennials are more worried about taxes than any other age group — 74% of respondents reported tax prep–related fears, including making errors and not getting the full refund. So to help ease the confusion caused by pairing taxes with student loans, we’re here with a few things to keep in mind. Please note that, while we have compiled some helpful information below, Climb is not a tax advisor. You should consult a tax professional if you have any questions about your taxes or concerns about how to file correctly.
1. You may be able to deduct student loan interest
When filing taxes, some borrowers can deduct the interest paid on their student loans from their income. The IRS website outlines who is eligible: people who earn an adjusted gross income of less than $65,000 (when filing as single or head of household) or $135,000 (when married and filing jointly) qualify for the full deduction — a maximum of $2,500. People who earn up to $80,000 (single) or $165,000 (filing jointly) qualify for a reduced amount.
What else qualifies you for this deduction? You (or your spouse, if filing jointly) must be legally obligated to pay the loan. No one else can claim you as a dependent on their tax return. You must also not file a separate married tax return — only single, head of household, widow(er), or married filing jointly qualify. For even more information on rules and limitations, check out The Federal Student Loan Interest Deduction.
2. Filing jointly with a spouse could increase your student loan payments
If you have a spouse, a joint tax filing combines both of your incomes. According to the Department of Education’s blog, this could then increase your monthly student loan payments as well if you’re currently on an income-based repayment plan. It’s important to remember, though, that there are also negative effects of filing separately when married. Before making any decisions on how to file your taxes, you should talk to a professional. Look at your own unique situation to determine if the benefits or downsides of one method outweigh those of the other.
3. If your loans are forgiven, remember to consider the amount when filing your taxes
Of course, having your federal student loans forgiven is a good thing. But as Melanie Lockert at Student Loan Hero notes, one thing to keep in mind is that the government may tax the leftover amount. For some loan forgiveness programs, such as Public Service Loan Forgiveness, the remaining balance won’t be taxed, but it will for others — like income-based repayment plans or loan cancellation and discharge programs.
If you fall into the latter categories, plan ahead and make sure you have enough money in the event of a larger tax bill. The Federal Student Aid website has a Repayment Estimator, where you can check to see how much of your student loan might be forgiven in the future.
4. You shouldn’t count your loan as income
It’s understandable to assume that a student loan is a type of income. After all, it’s money going to your use, and grants and stipends both count as income on your return. The key difference, though, is that student loan funds aren’t yours to keep. You have to pay them back with interest, as opposed to simply receiving money to use for tuition, so you don’t need to include this money as income, according to the folks over at TurboTax. Doing so will actually hurt you because higher income means higher taxes — taxes based on an income you don’t actually have.
5. If you don’t make student loan payments, your taxes could be garnished
Lockert also says that the IRS can garnish your tax refund in order to recover unpaid student loan bills. This only applies to federal student loans, though, not private loans, and only to loans which are in default. So don’t worry, missing a payment won’t automatically result in a garnishment, and funds from private loans (such as a Climb loan) won’t be affected at all. If this does apply to you, though, you’ll want to get your student loan out of default.
Once again, we want to remind you that we are not licensed to give tax advice — for further information about your individual tax situation and which steps would be best for you to take, we encourage you to speak to a tax professional.
3 thoughts on “Student Loans and Taxes: 5 Things to Keep in Mind When Filing”
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One other issue is that if you are in a circumstances where you do not have a cosigner then you may actually want to try to make use of all of your financing options. You can find many grants and other scholarships that will supply you with money to support with education expenses. Thanks for the post.