With tax season in full swing, student loan borrowers are looking for savings. “Money is especially tight for recent graduates,” says Curt Henderson, President of Bright Horizons Financial Services. “Borrowers can and should maximize credits and deductions related to their loans.” Henderson urges borrowers to get the facts on student loan tax breaks before filing.
FACT: You may be able to deduct up to $2,500 for interest paid on a qualified student loan.
You may take this deduction as long as your modified adjusted gross income is less than $75,000 or $155,000 for married filing jointly status. Note: this is your income before taking the deduction which can be taken even if you do not itemize.
FACT and FICTION: Forgiven student loans are taxable.
If you’re enrolled in an income-driven payment plan with a forgiveness option after 10, 20 or 25 years, you may be wondering if the forgiven balance is taxable. The good news is you won’t owe taxes on forgiven student loan debt if it is part of the Public Service Loan Forgiveness program. Non-public service workers will face taxes for forgiven balances. If you are a teacher, law enforcement officer, nurse or other public service worker, review your options for student loan forgiveness.
FACT: You can deduct voluntary or extra interest payments.
If you are on a repayment plan that results in a monthly payment that is lower than the interest accrued or your loans are in deferment, forbearance, or have not yet entered repayment status, you can deduct extra or voluntary payments if they are allocated as interest for tax purposes. For example, if you are on the Income-Based Repayment Plan with a $10 per month payment, but the interest is $150 per month, and you pay an extra $100, then you can deduct this amount.
FICTION: You can deduct interest on a loan paid to a friend or relative.
If a friend or relative loaned you money for your education, and you are in the process of repaying that loan, you cannot take any student loan deductions. Tax breaks are only available for Federal and private (from a major lender) student loans.
FACT: Room and board are considered qualified education expenses for a tax credit.
The cost of room and board qualifies to the extent that it is not greater than the amount determined allowable by the school attended. For example, if you took out a loan for living expenses and the school allows $2,000 per semester but your cost of living off campus is $3,000 then only $2,000 of the loan would qualify.
FICTION: You can claim the deduction for payments you made on your loans if your parents still claim you as a dependent on their tax return.
If your parents claim you as a dependent on their tax return, but the loan is in your name and only you are legally obligated to make payments, then no one will be able to take the tax deduction.
For more details about the IRS rules please see IRS Publication 970 and seek a qualified tax professional to address questions specific to your situation.
About Bright Horizons Financial Services
Bright Horizons Financial Services is a trusted partner for people seeking a brighter financial future, through expert advice, coaching and education. Bright Horizons offers programs designed to lift people out of debt and build sustainable wealth, including: Student Loan Peace, a loan consolidation help service (learn more at studentloanpeace.com), and Financial Growth Coach (learn more at financialgrowthcoach.com).