Student loans and taxes: The ultimate guide

Student loans affect taxes in multiple ways—according to the IRS, you can deduct up to $2,500 in interest paid annually, but loan forgiveness may be treated as taxable income depending on the specific program and timing. Understanding these rules helps you maximize refunds and avoid surprise tax bills.

Whether you are a parent managing loans for a child or a graduate handling your own repayment, the intersection of student debt and tax law can be complex. You might be missing out on valuable deductions, or conversely, you might be unaware of potential tax liabilities associated with loan forgiveness. This guide covers everything you need to know to navigate tax season with confidence.

You’ll learn:

• How to claim the student loan interest deduction and who qualifies
• Which loan forgiveness programs are tax-free and which are taxable
• How employer repayment assistance affects your taxable income
• Strategic tax planning tips to lower your Adjusted Gross Income (AGI)

Understanding the tax landscape is the first step toward optimizing your financial strategy. Let’s look at how these two financial worlds intersect.

How student loans and taxes intersect

To navigate tax season effectively, it helps to see the big picture. Student loans intersect with your taxes in three primary areas: deductions, credits, and potential income liability. Understanding these distinct categories ensures you don’t leave money on the table or get caught off guard.

First, the student loan interest deduction allows you to reduce your taxable income based on the interest you’ve paid during the year. This applies to both federal and private loans. Second, education tax credits (like the American Opportunity Tax Credit) apply to tuition and fees paid, often using loan proceeds, during the years the student is enrolled. Finally, loan forgiveness or cancellation can sometimes be treated by the IRS as “income,” meaning you could owe taxes on the amount forgiven, though there are currently significant temporary exceptions.

The key document connecting your loans to your tax return is Form 1098-E, which lenders send to borrowers who paid significant interest. We will cover this form in detail later, but knowing to look for it is essential.

Student loan interest deduction: Eligibility, limits, and how to claim

The student loan interest deduction is the most common tax benefit available to borrowers. Unlike many other tax breaks, this is an “above-the-line” deduction, meaning you can claim it even if you take the standard deduction and do not itemize. This makes it accessible to the vast majority of borrowers.

According to IRS Publication 970, you can deduct the lesser of $2,500 or the actual amount of interest you paid during the year on qualified student loans. A qualified student loan is one you took out solely to pay qualified education expenses (tuition, fees, room and board, books) for yourself, your spouse, or your dependent.

Both federal and private student loans are eligible for this deduction. However, loans from a related person (like a parent or sibling) or a qualified employer plan do not qualify.

Not everyone qualifies for the full deduction. Your eligibility depends on your Modified Adjusted Gross Income (MAGI). The deduction phases out for higher earners. According to the IRS, for the 2024 tax year (returns filed in 2025), the following parameters apply:

• Single, Head of Household, or Qualifying Surviving Spouse: The deduction begins to phase out at a MAGI of $80,000 and is completely eliminated if your MAGI is $95,000 or higher.
• Married Filing Jointly: The deduction begins to phase out at a MAGI of $165,000 and is eliminated at $195,000 or higher.
• Married Filing Separately: Borrowers with this filing status are not eligible to claim the student loan interest deduction.

It is important to note that for this specific deduction, your MAGI is calculated by taking your AGI and adding back the student loan interest deduction itself, along with certain other foreign income exclusions.

Only the person legally obligated to pay the loan can claim the interest deduction. This creates a common point of confusion for families:

• If a parent borrows a Parent PLUS loan: The parent is legally liable and can claim the deduction, provided the student is their dependent.
• If a student borrows a loan but the parent pays it: The IRS treats this as if the parent gave the money to the student, and the student paid the loan. Therefore, the student is eligible to take the deduction (if they are not claimed as a dependent). If the student is claimed as a dependent, neither party can claim the deduction.

You claim this deduction on Schedule 1 of Form 1040. You will enter the allowable amount on Line 21. You do not need to fill out a separate worksheet to file with your return, but using the worksheet in the Form 1040 instructions helps you calculate the correct amount if you are in the phase-out range.

To claim this accurately, you will need the tax form provided by your loan servicer, which we will discuss next.

Learn more about federal loan options or compare private student loans.

Understanding Form 1098-E: Your student loan interest statement

Form 1098-E is the official record of the student loan interest you paid during the tax year. Think of it as the W-2 of student loans—it provides the proof you need to claim your deduction accurately.

According to IRS regulations, loan servicers are required to send Form 1098-E by January 31 for the prior tax year. While some servicers still mail paper copies, most provide them electronically through your online account. If you haven’t received yours by early February, log in to your loan servicer’s portal and check your “Tax Documents” or “Statements” section.

Servicers are only legally required to send a Form 1098-E if you paid $600 or more in interest during the year. However, this does not mean you cannot claim the deduction if you paid less. If you paid $300 in interest, you are still entitled to deduct that $300. You will simply need to look at your billing statements or payment history to calculate the total interest paid manually.

The form is relatively simple:

• Box 1: This shows the student loan interest received by the lender. This is the number you generally use for your tax return (subject to the $2,500 limit).
• Box 2: This is rarely used but indicates if box 1 includes loan origination fees or capitalized interest, which are also deductible.

If you have loans with multiple servicers (for example, a federal servicer and a private lender), you will receive a separate 1098-E from each one. You must add the amounts from Box 1 on all forms together to determine your total interest paid.

Record-Keeping Tip: Always keep digital or physical copies of your 1098-E forms for at least three years. If the IRS questions your deduction, this form is your primary proof.

Tax implications of student loan forgiveness

While the interest deduction puts money back in your pocket, loan forgiveness has the potential to do the opposite. Generally, the IRS treats canceled debt as taxable income. However, specific rules and temporary laws currently protect most student loan borrowers from this “tax bomb.”

Under standard IRS rules, if a lender forgives $10,000 of your debt, the IRS views that $10,000 as income you received, potentially increasing your tax bill. Fortunately, most student loan forgiveness programs are currently exempt from this rule.

Public Service Loan Forgiveness (PSLF): Amounts forgiven under PSLF are permanently tax-free at the federal level. This is a statutory feature of the program.

Income-Driven Repayment (IDR) Forgiveness: Historically, forgiveness received after 20 or 25 years on an IDR plan was taxable. However, according to the American Rescue Plan Act (ARPA), all student loan forgiveness is temporarily tax-free at the federal level through December 31, 2025. Unless Congress extends this provision, IDR forgiveness granted starting January 1, 2026, may once again be treated as taxable income.

According to the Tax Cuts and Jobs Act of 2017, death and Total and Permanent Disability (TPD) discharges are tax-free. This provision was also set to expire but is currently covered under the broader ARPA exemption through 2025. Borrowers receiving TPD discharge do not need to worry about federal taxes during this window.

Source: IRS.gov and American Rescue Plan Act provisions (effective through Dec 31, 2025)

While federal taxes are the primary concern for most, state taxes introduce another layer of complexity.

State tax treatment of student loan interest and forgiveness

It is critical to remember that federal tax rules do not automatically apply to state taxes. While many states “conform” to federal tax law—meaning they follow the IRS’s lead—others have their own distinct tax codes.

Even though federal law currently exempts student loan forgiveness from taxation through 2025, some states may still treat forgiven student loan debt as taxable income. For example, in recent years, states like Indiana, North Carolina, and Mississippi have had complex rules regarding whether they conform to federal student loan tax exemptions. If you receive loan forgiveness, you could face a state tax bill even if you owe $0 to the IRS.

Similarly, not all states allow you to deduct student loan interest from your state taxable income. Some states have no income tax at all, while others may have different limits or eligibility requirements than the federal government.

Action Step: If you anticipate receiving loan forgiveness, check your state’s specific Department of Revenue website or consult a tax professional. Do not assume that “tax-free” at the federal level means tax-free everywhere.

Employer student loan repayment assistance and taxes

A growing number of companies are offering student loan repayment assistance as an employee benefit. From a tax perspective, this is one of the most valuable benefits available, thanks to Section 127 of the Internal Revenue Code.

According to the CARES Act and subsequent legislation, employers can contribute up to $5,250 per year toward an employee’s student loans tax-free through December 31, 2025. This means the money your employer pays toward your loans is excluded from your taxable income on your W-2.

According to Mark Kantrowitz, financial aid expert, “Every dollar you save is a dollar less you have to borrow.” In this context, every dollar your employer pays is a dollar of principal you don’t have to pay from your own post-tax earnings.

Typically, the employer pays the loan servicer directly. The $5,250 limit is a combined limit for all educational assistance, including tuition reimbursement. If your employer pays more than $5,250, the excess amount is treated as taxable wages.

Important Note: You cannot “double dip.” You cannot claim the student loan interest deduction on the portion of interest paid by your employer tax-free. However, if you paid additional interest out of your own pocket beyond what the employer covered, you may still deduct that portion.

Education tax credits and student loans

While the interest deduction applies during repayment, education tax credits are generally claimed while the student is still in school. It is common to use student loans to pay for the expenses that generate these credits.

Unlike a deduction, which lowers your taxable income, a credit reduces your tax bill dollar-for-dollar. This usually makes credits more valuable.

• American Opportunity Tax Credit (AOTC): According to the IRS, worth up to $2,500 per year for the first four years of higher education. Up to $1,000 of this is refundable, meaning you can get money back even if you owe zero tax.
• Lifetime Learning Credit (LLC): According to the IRS, worth up to $2,000 per year per tax return. It is non-refundable and available for an unlimited number of years, making it ideal for graduate students or continuing education.

You can claim these credits for tuition and fees paid with student loan money. The IRS treats loan proceeds as if you paid the cash yourself. However, you cannot claim both a tax credit and a tax deduction for the same expense.

For example, if you take out a loan to pay tuition, you can claim the AOTC based on that tuition payment. Later, when you repay the loan, you can deduct the interest paid. This is allowed because the credit was for the tuition, and the deduction is for the interest.

Read more about financial aid basics or understanding college costs.

Federal vs. private loans: Tax considerations

When comparing federal and private loans, borrowers often wonder if the tax perks differ. The good news is that for the most common benefit—the interest deduction—they are treated equally.

Interest Deduction: Interest paid on qualified private student loans is just as deductible as interest on federal Direct Loans. The same $2,500 limit and income thresholds apply. Private lenders will also send you a Form 1098-E if you meet the reporting threshold.

Forgiveness Differences: The major difference lies in forgiveness. Federal loans have structured forgiveness paths (PSLF, IDR) that are currently tax-advantaged. Private lenders rarely offer forgiveness. In the rare event a private lender settles a debt for less than you owe, they will likely issue a Form 1099-C, and that canceled debt is generally taxable income unless you can prove insolvency.

While taxes shouldn’t be the only factor in choosing a loan, knowing that private loan interest is deductible can help you calculate the true cost of borrowing.

Compare federal and private student loans.

Tax planning strategies for student loan borrowers

Don’t just wait for tax season to think about your loans. Strategic planning throughout the year can help you maximize your benefits.

According to the IRS, if you are close to the income phase-out limit ($80,000 for singles in 2024), consider strategies to lower your MAGI. Contributing more to a traditional 401(k) or HSA reduces your taxable income, potentially keeping you eligible for the full student loan interest deduction. According to Sandy Baum, higher education finance expert, “Borrowing is not inherently bad; the question is how much, and under what terms.” Part of managing those terms is using the tax code to your advantage.

If you are below the $2,500 deduction cap for the year, making an extra payment in December that covers January’s interest can pull that deduction into the current tax year. Conversely, if you’ve already maxed out the $2,500 limit, waiting until January to pay pushes that interest into the next tax year where it might be deductible.

If you are pursuing IDR forgiveness that is scheduled to occur after 2025, begin saving now for a potential tax bill. While laws may change, it is safer to have a “forgiveness fund” set aside in a high-yield savings account than to be caught unprepared.

• January: Log in to all servicer accounts to download Form 1098-E.
• February-March: Calculate total interest paid across all loans.
• April: File Schedule 1 with your 1040 to claim the deduction.
• November: Review year-to-date interest paid and consider timing year-end payments.

How to report student loan information on your tax return

Reporting your student loan interest is straightforward, whether you use tax software or file by paper.

For Software Users:
Most tax software (TurboTax, H&R Block, etc.) will ask, “Did you pay student loan interest?” early in the questionnaire. You will simply input the amount from Box 1 of your 1098-E forms. The software automatically calculates your MAGI to determine if you are eligible and applies the phase-out rules if necessary.

For Paper Filers:
You will need Schedule 1 (Additional Income and Adjustments to Income).
1. Locate the line for “Student loan interest deduction” (Line 21 on the 2023/2024 forms).
2. Enter the smaller of your total interest paid or $2,500.
3. This amount is then subtracted from your total income on Form 1040, Line 10.

Common Mistake to Avoid:
Do not double-count if you have multiple servicers. If Servicer A reports $1,500 and Servicer B reports $1,200, your total paid is $2,700, but you can only claim the maximum of $2,500 on the line item.

Frequently asked questions

If the loan is in your name (you are legally obligated to pay) but your parents make the payments, the IRS treats it as a gift to you. You can claim the deduction as if you paid it yourself, provided you are not claimed as a dependent on their tax return.

Generally, no. According to the American Rescue Plan Act, most student loan forgiveness granted between 2021 and December 31, 2025, is free from federal income tax. However, state taxes may still apply depending on where you live.

Yes, but not for the same expenses. You can claim education credits (like the AOTC) based on tuition paid with loan proceeds, and separately claim the deduction for interest paid on those loans during repayment.

Unfortunately, the deduction is capped at $2,500 per tax return, regardless of how much you paid. The excess interest cannot be carried forward to future years.

No. The student loan interest deduction is an “adjustment to income” (above-the-line), meaning you can claim it in addition to the standard deduction.

Taxes can be complicated, but for student loan borrowers, the rules are generally designed to offer relief. By staying organized and understanding the deductions available to you, you can effectively lower the cost of your debt.

Key takeaways:

• According to the IRS, you can deduct up to $2,500 in student loan interest annually if you meet income requirements—even if you don’t itemize.
• Most federal student loan forgiveness is tax-free through 2025, but you should prepare for potential tax liability on IDR forgiveness after that date.
• Form 1098-E is your essential document; download it from every servicer you paid interest to.
• State tax rules may differ from federal ones, so always verify your state’s treatment of forgiveness.
• Private student loans offer the same interest deduction benefits as federal loans.

Managing student debt confidently means looking at the whole financial picture. Now that you understand the tax implications, check your records to ensure you’re claiming every dollar you deserve.

References and resources

• IRS Publication 970: The official IRS guide to Tax Benefits for Education, including detailed worksheets for deductions and credits.
• StudentAid.gov: The Department of Education’s portal for all federal loan information, including forgiveness program details.
• IRS Form 1098-E Instructions: Specific guidance on understanding the interest statement provided by your servicer.
• State Department of Revenue Websites: Check your specific state’s tax agency for rules regarding conformity to federal student loan tax provisions.