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An estimated 40 million Americans have student loan debt. While many are seeking to pay off their loan burdens as soon as possible, interest continues to accrue.
The good news is the government wants to help manage those interest payments.
Come tax season, there are a few ways to include your student loans while filing your taxes. And if you're still in school, a few tax credits might help you as well.
Before considering deductions and credits, knowing the basics of how student loans play into your taxes is essential.
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Here are seven tips for navigating your student loans while filing your taxes.
1. Use the student loan interest deduction
The biggest benefit of paying your student loans (besides them eventually being paid off, of course,) is that you can write off interest paid as a deduction, which can potentially help you save hundreds on your tax bill.
You can deduct up to $2,500 through the student loan interest deduction; it does not need to be itemized. Those who have paid $600 or more in interest on their loans will be sent a Form 1098-E from their student loan servicer.
"Even if you're below the $600, that by itself doesn't mean that you aren't able to claim a deduction," says Eric Bronnenkant, head of tax at Betterment. "It just means you won't get a tax form from your servicer. But you should still take advantage of the deduction."
Keep in mind that a tax deduction is different from a tax credit. Under a credit, you subtract the credit amount from your total taxes due; with a deduction, your taxable income is reduced by the deduction amount and you save a percentage of money you aren't paying taxes on, according to your tax bracket.
The deduction also comes with limits. If you are filing single with an adjusted gross income over $65,000, the deduction starts to lessen until it's eliminated at $80,000; the same happens for couples filing jointly with an AGI of $135,000 and phases out at $165,000 for a joint return.
Bronnenkant adds that the standard deduction increased this year, and that you don't need to itemize the student loan deduction — it's an "above the line" reduction. This means you can claim both the standard deduction and student loan interest deduction, thus lowering your overall tax bill even more, Bronnenkant says.
2. Filing as a dependent
If your parent is claiming you as a dependent, you cannot deduct student loan interest from your overall tax bill.
However, Bronnenkant points out that if someone is helping you pay your student loans, like a parent or grandparent, and is not listing you as a dependent, you can still take advantage of the interest deduction.
"Let's say you're 25 years old, on your own, not a dependent anymore," Bronnenkant says. "Say you're struggling and your grandparents are paying your student loans to help you get by. That's fine — that's actually a good thing. It's actually assumed the money is gifted to the grandchild, who then pays the interest — and so the grandchild gets the deduction in this scenario."
3. Watch out for the marriage penalty
The marriage penalty is an industry nickname for a total tax bill being affected by a married couple filing their taxes jointly. Often, joint filing can result in a higher total tax bill than if the couple filed separately.
Bronnenkant says that there aren't any situations where being married and filing separately would be beneficial while deducting student loan interest on taxes. In fact, married couples filing separately are not eligible for the student loan interest deduction.
4. Take advantage of relevant tax credits if you're still in school
While those still in school aren't required to make payments toward their student loans, that doesn't mean they can't use their student status to their full advantage on their taxes.
There are two main tax credits for those who are still in school:
The American Opportunity Credit
The American Opportunity Credit is worth up to $2,500 per student per year, but can only be claimed four total tax years per student.
The AOC has strict qualifying requirements, including:
- The student must be attending school at least half-time for at least one academic term.
- The student must not have finished the first four years of a post-secondary program prior to the end of the tax year.
- The student must be pursuing a program that will end with a degree or other recognized credential.
The Lifetime Learning Credit
The Lifetime Learning Credit, worth up to $2,000 per year, per student, has less strict requirements:
- There is no minimum on hours enrolled to qualify, and no limit to how many years the credit can be claimed.
- The credit covers tuition, books, fees and supplies for any student pursuing college or career education.
5. Avoid default at all cost
More than 1 million people default on their student loans each year. Not only can defaulting on anything hurt your credit loan, it has the potential to have your wages garnished — or your tax return withheld.
"This won't happen if you've taken appropriate steps to set up a repayment plan or forgiveness program," says Josh Zimmelman, owner and president of Westwood Tax & Consulting. "But if you're just in default on your loans, then your tax refund is at risk."
Student loans don't go into default if you miss one payment. Ninety days after a loan is past due, it is then reported to the three major credit bureaus. After 270 days, the loan goes into default — which is when it drastically damages credit and erases any eligibility for deferment, forbearance and forgiveness.
If you are struggling with student loan payments, consider calling your servicer to create a plan that will help you better manage the cost. You might be eligible for a hardship program or settlement.
6. Don't use 529 funds to make student loan payments.
Under current law, funds in 529 plans can be used on a 100 percent tax-free basis when put toward qualified educational expenses, such as tuition and fees or room and board.
However, you cannot use 529 funds to make student loans payments. If you do, you'll be hit with a 10 percent penalty and will be taxed on that money as income.
7. Received forgiveness? Get ready to pay
Student loans are not taxable as income.
However, if you are granted loan forgiveness, then you will be taxed on the total amount forgiven.
Keep in mind that loan forgiveness is not the same as loan discharge. Any student loan debt that is discharged due to death or total and permanent disability (TPD) is no longer taxable. This law is in effect for eligible loans discharged from Jan. 1, 2018 to Dec. 31, 2025.
Resources for tax help with student loans
Overall, navigating student loans on your taxes can be tricky. Thankfully, there are plenty of resources available to help guide you through the process.
Those who want direct help from the IRS can access the 970 worksheet, titled "Tax Benefits for Education," through its website. This worksheet outlines tuition reductions, how to claim credits, an explanation of the interest deduction and more.
Those who feel unsure of filing their taxes themselves should reach out to a certified accountant for help.
Need more help? Check out Bankrate's 10 best tax-planning tips for filing in 2019.