Are Student Loans Taxed As Income?June 3, 2021
As a college student, how much you make can be an important factor in many situations. A few examples include applying for a credit card, filing your tax return and filling out your Free Application for Federal Student Aid (FAFSA).
So as you receive student loan funds to help you pay for school, you may be wondering, do student loans count as income? The short answer is no, and here’s why.
Do Student Loans Count as Income for Taxes?
You never have to worry about paying income taxes on the student loans you receive while you’re in school because it’s a debt, not a source of income.
There are, however, some instances where taxes can come into play with your student loans. For starters, once you start making your monthly payments after you leave school, you may be able to deduct up to $2,500 in interest you pay on your loans every year when you file your taxes.
Up until recently, certain types of student loan forgiveness were taxable. For example, if you choose to get on an income-driven repayment plan, your repayment term will be extended to 20 or 25 years, depending on the plan. If you have a balance remaining at the end of that period, the remainder will be forgiven.
And because income-driven repayment plans don’t require any sort of work to qualify, as with the Public Service Loan Forgiveness (PSLF) program and Teacher Loan Forgiveness program, discharged debt was considered taxable income.
With the passing of the American Rescue Plan, however, all forms of federal student loan forgiveness are temporarily excluded as income on your tax return. The only caveat is that this provision expires on Jan. 1, 2026.
So unless you have just a few years left on your income-driven repayment plan, this new benefit won’t affect you. But if it’s extended, you may be able to take advantage of it in the future.
Are Student Loans Considered Income for Other Purposes?
Student loans aren’t counted as income for other reasons beyond taxes for one simple reason: they’re debt that you have to repay. In contrast, money earned from a part-time job, side business or interest on your bank account is considered income for all of those purposes.
So if you’re thinking about applying for a student credit card or you’re filling out your FAFSA for the upcoming school year, know that student loans aren’t considered income.
This is especially important to understand if you’re applying for a credit card or loan because if you inflate your income on a loan application, it could be considered fraud.
What About Other Forms of Financial Aid?
In many cases, college students get more than just student loans as financial aid. If you’re also receiving scholarships, grants, fellowships or work-study opportunities, you may be wondering how they come into play for taxes and other income purposes.
With some of these types of financial aid, it may not be as straightforward. For instance, with a work-study program, it’s essentially like working a regular part-time job, so any income you receive is taxable.
On the flip side, scholarships and fellowships may or may not be taxable, depending on the situation. In most cases, scholarship and fellowship money isn’t taxable if you’re a candidate for a degree at an eligible educational institution and you use the scholarship funds to directly cover the costs of tuition, fees, books and supplies.
But if your scholarship or fellowship funds are earmarked for other purposes, such as room and board, travel, research and nonmandatory equipment and supplies, it could be taxed as income. Additionally, if a scholarship or fellowship has a service requirement attached — for example, you must work as a research assistant to qualify — it’s likely going to be taxable because it’s effectively payment for your service.
The Bottom Line
Do student loans count as income for taxes or other purposes? No, you’ll never have to worry about including what you receive in student loan funds as income on your tax return, loan applications or other situations.
This is because student loans aren’t considered income but debt.
However, other forms of financial aid you receive may be considered income and may be taxable. So it’s important to check with your financial aid office to determine how to handle your financial aid.
In a work-study program, the employer may withhold federal and state income taxes from your paychecks, so you don’t have to worry about a big tax bill at the end of the year. But if you’re receiving a taxable scholarship or fellowship, you may want to set aside some of the money to pay your taxes.
As with any tax-related situation, it’s a good idea to consult with a tax professional to get the personalized advice you need.