Paying student loans can be difficult. It’s important to know how these payments will affect your taxes.
When you pay off your student loans, you might be surprised to learn that the federal government doesn’t consider them a deduction. Even if you have a lot of student loan debt, it won’t be considered as an expense for tax purposes. However, there are still ways that paying off your student loans can affect your taxes negatively or positively.
If you’re paying off your student loans through an income-driven repayment plan, such as Income-Based Repayment or Pay As You Earn, then you may be eligible for Public Service Loan Forgiveness (PSLF). This program allows borrowers with federal Direct Loans to have their remaining balance forgiven after 120 qualifying monthly payments (or 10 years of qualifying payments if not in an income-driven plan). Because the forgiveness is considered taxable income by the IRS, it can negatively affect your taxes if you don’t account for it properly when filing your return.
How Much Can Student Loans Take From Taxes
If you’re still in school and receiving money from student loans, this is not considered taxable income, since you’re obligated to pay it back.
If you’ve graduated and are making payments on your student loans, you may be able to deduct some of the student loan interest you’ve paid. Whether or not you can take the student loan interest deduction will depend on your income and tax-filing status.
While the principal amount of your student loans is not tax deductible, the interest you pay on your student loans might be. Depending on your income and tax-filing status, you may be able to deduct up to $2,500 in student loan interest from your taxable income each year.
If you’re still attending school, you may also qualify for one of two different education tax credits: the American opportunity tax credit and the lifetime learning credit.
will my tax refund be garnished during covid-19
Collection activities are currently paused through Nov. 1, 2022 for all federal student loans and commercially held FFEL debt, which could protect your 2021 refunds. The Department of Education has said that borrowers with loans in default will be given the opportunity to enter a payment plan — which would prevent tax refund garnishment — before collection activities restart.
Relief checks issued due to the coronavirus pandemic also aren’t being taken for defaulted federal loans. But your check could be at risk if a judge has allowed a lender to garnish your bank account due to a defaulted private student loan.
All you need to do is call the lender servicing your student loan with this information:
- The dates you made payments
- The amount of each payment
- How many of the payments you want refunded
Borrowers who make payments to multiple loan servicing agencies would need to call each lender, but if you need the money, it’s time well spent.
When you get them on the line, it would help considerably to ask the lender for the date when you should expect the money to be refunded and how it will be refunded. Mark that date on your calendar and if you haven’t received the refund by then, make another call to the lender to see what happened.
If you happen to be part of the Student Loan Forgiveness Program, you can ask for a refund and not hurt your status. Even though you asked for the money back, as long as all other requirements were met, the payments you made still count toward the 120 payments needed to receive forgiveness.