Do Student Loans Count as Income on My Taxes?
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Generally, debt of any kind that must be paid back doesn’t count as income on your taxes, including student loans.
However, if some or all your student loans are canceled or forgiven, it might be considered income that you’ll have to pay taxes on — with some exceptions.
If you’re wondering whether student loans count as income, here’s what you should know:
Student aid that does NOT count as income
The IRS doesn’t see any loan that you must repay as income — such as credit card debt, personal loans, and mortgages, and student loans. Financial aid used to cover education expenses also typically isn’t taxed.
Examples of student aid that aren’t considered taxable income include:
Federal student loans
Loans provided by the federal government must be paid back in most cases. This means they won’t be taxed.
Some student loan forgiveness and repayment programs
Many student loan forgiveness programs don’t require you to pay taxes on the forgiven amount. This is usually the case with programs where you must work for a certain period of time in a specific field in order to have some or all your loans repaid.
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- National Health Service Corps Loan Repayment Program
Student loan discharge
Depending on the student loan discharge program, you might not have to pay taxes on the discharged amount. For example, you generally won’t be taxed if your federal loans were discharged due to:
- School closure
- False certification
- Refunds that your financial aid office didn’t return to your servicer if you withdrew from the school
Federal financial aid
If you submit the Free Application for Federal Student Aid (FAFSA), you might qualify for federal financial aid that doesn’t have to be repaid, such as Pell Grants. This type of aid isn’t considered taxable as long as you use the funds to cover required expenses to attend your school (like tuition and fees).
But if you use the money for other incidental expenses (like room and board) or receive an amount higher than the total of your qualified education expenses, you’ll need to report it in your gross income.
- American Rescue Plan Act of 2021
- CARES Act
- Coronavirus Response and Relief Supplemental Appropriations Act, 2021
Scholarships and grants used for education expenses
Like federal financial aid, other college scholarships and grants — such as those awarded by nonprofit organizations or businesses — usually aren’t taxed as long as you:
- Are enrolled in a degree-granting program at an eligible school
- Use the funds to cover required expenses to attend that school (like tuition and fees)
Private student loans
Private student loans offered by private lenders — including online lenders, banks, and credit unions — must be repaid. This means you won’t have to worry about paying taxes on the loan amount.
Learn More: Independent vs. Dependent Student: Which Are You?
Student aid that DOES count as income
While most student aid isn’t considered taxable income, some exceptions include:
Some student loan forgiveness programs
If you qualify for student loan forgiveness, you might have to pay taxes on the forgiven amount, depending on the program.
This is typically the case with programs that don’t require you to work in a certain profession for a certain number of years, such as income-driven repayment forgiveness.
Work-study programs
Federal work-study programs provide part-time jobs to undergraduate and graduate students with financial need. But while these jobs can help you cover your education expenses, they’re also subject to income taxes like any other kind of employment.
Scholarships or grants used for non-school-related expenses
Scholarship and grant funds typically aren’t considered taxable income as long as you use the funds for qualified education expenses.
But if you spend the money on other non-school-related costs (such as housing or travel), you’ll have to report it as part of your gross income and pay taxes on it.
Scholarships with service-related requirements
Some scholarships and fellowships come with service-related requirements. In most cases, you’ll have to pay taxes on the income you receive from this type of arrangement.
Employer tuition assistance
Many employers offer tuition assistance as a benefit to attract employees. If your employer helps cover your tuition costs, you’ll have to pay taxes on any assistance amount over $5,250.
Check Out: Parents Paying for College: Tips and Advice
Tax benefits and deductions for students
Students might be able to take advantage of a few federal income tax benefits and deductions, which could help offset some of your education costs.
American Opportunity Tax Credit
With this credit, college students can get a tax credit of up to $2,500 for qualified education expenses (such as tuition and fees) during their first four years of school — which also means you can claim this credit only four times.
If the credit brings your owed tax amount down to zero, you can get 40% of any remaining amount of the credit, up to $1,000, as a refund.
- Full credit amount: Modified adjusted gross income (MAGI) is $80,000 or less (or $160,000 or less if married filing jointly)
- Partial credit: MAGI is higher than $80,000 but less than $90,000 (or over $160,000 but less than $180,000 if married filing jointly)
- Not eligible: MAGI is higher than $90,000 (or higher than $180,000 for joint filers)
Lifetime Learning Credit
If you’re pursuing an undergraduate, graduate, or professional program, claiming this credit could get you a credit of 20% of the first $10,000 of qualified education expenses with a maximum of $2,000.
Unlike with the American Opportunity Tax Credit, there’s no limit to how many times you can claim the Lifetime Learning Credit.
- Full credit amount: MAGI is $80,000 or less (or $160,000 or less if married filing jointly)
- Partial credit: MAGI is higher than $80,000 but less than $90,000 (or over $160,000 but less than $180,000 if married filing jointly)
- Not eligible: MAGI is higher than $90,000 (or higher than $180,000 for joint filers)
Also keep in mind that you can only claim one education credit per tax year. So if you claim the American Opportunity Tax Credit, you can’t also claim the Lifetime Learning Credit — and vice versa.
Student loan interest deduction
With this deduction, you can subtract up to $2,500 in student loan interest that you paid during that tax year on a qualified student loan. To qualify for the full deduction, your modified adjusted gross income (MAGI) must be less than $70,000 (or less than $140,000 if filing jointly).
If your MAGI is between $70,000 and $85,000 (or between $140,000 and $170,000 if filing jointly), the amount you can deduct will be gradually reduced. Borrowers with an MAGI higher than $85,000 (higher than $170,000 if filing jointly) can’t claim this deduction.
However, if you’ve received any scholarships, grants, or other financial aid that you don’t have to repay, you might be able to list any funds left over after paying your tuition and other required college expenses as income. If you’re unsure what to include, reach out to the lender for guidance.
If you’ve exhausted your scholarship, grant, and federal student loan options, a private student loan could help cover any financial gaps left over. Before applying for a private student loan, be sure to shop around and consider as many lenders as possible to find the right loan for you.
Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
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