Tax season is underway. If you have outstanding student loans, your loan balance can impact your tax return. If you aren’t prepared, you could lose out on valuable deductions or get a surprise tax bill.
How student loans affect your taxes depends on your income and whether you qualify for loan forgiveness. Here’s what you should know:
Key Takeaways
- Approximately 12 million borrowers are eligible for the student loan interest tax deduction, according to a report from American Progress.
- Some forms of loan forgiveness can result in a surprise tax bill.
- If you qualify for employer student loan repayment assistance, some of the contributions are exempt from taxes.
Student Loans and Taxes: What You Should Know
Your student loans can have a significant effect on your taxes. Here are the most common ways student loans can affect your taxes:
1. You Could Be Eligible for the Student Loan Interest Tax Deduction
Impact: You could reduce your taxable income by as much as $2,500.
When you are making payments toward student loans, any help you can get can make a big difference.
If you have private or federal student loans, you may be eligible for the student loan interest tax deduction. The deduction can help reduce your taxable income, potentially lowering your tax bill. to reduce your taxable income.
The student loan interest tax deduction is an “above the line” deduction, so you don’t have to itemize your taxes to claim it. If you’re eligible, the deduction will reduce your taxable income by $2,500 or the amount of interest you paid, whichever is less. However, there are income restrictions; the deduction is phased out as your income increases, and once it reaches a certain point, you may no longer be eligible. You can view the latest income limits on IRS.gov.
2. You May Have to Pay Income Taxes on Student Loan Forgiveness
Impact: If you qualified for student loan forgiveness under an income-driven repayment plan, you may have a large tax bill.
Having your loans wiped out sounds like a dream come true. But in some cases, that dream can become a nightmare in the form of a huge tax bill. Whether student loan forgiveness results in a surprise tax bombs depends on the type of forgiveness you qualify for:
- Public Service Loan Forgiveness (PSLF): This federal loan forgiveness program is for non-profit and government employees. Loans forgiven under PSLF are exempt from federal income taxes.
- Income-driven repayment (IDR) forgiveness: IDR plans are alternative payment plans for federal student loans. Under these plans, borrowers who have balances at the end of their repayment terms can qualify for loan forgiveness. However, now that the American Rescue Act has expired, loans forgiven through IDR plans are taxable as income, so you may face a hefty tax bill.
Depending on where you live, student loan forgiveness may be considered income on state income taxes, too. If you expect some or all of your loans to be forgiven, talk to a tax professional in your state to plan for the upcoming tax season.
3. National or State Student Loan Repayment Programs (LRPs) May Be Taxable as Income
Impact: Depending on which forgiveness program you qualified for, you may have a surprise tax bill.
There are national and state LRPs that repay portions of your debt in exchange for a commitment to work in high-need areas for several years. How these programs are taxed varies by program and state. For example:
- John R. Justice: Lawyers that work as prosecutors at the state or local government level and public defenders can qualify for assistance with their federal loans through the John R. Justice program. According to the IRS, the assistance received through the program isn’t taxable at the federal level, but states may have different guidelines.
- National Health Service Corps (NHSC) LRP: The NHSC LRP provides up to $50,000 in student loan repayment assistance to primary medical, dental, and mental and behavioral health clinicians that commit to working in NHSC-approved communities. The funds provided through the program are not taxable as income.
- Florida Nursing Student Loan Forgiveness Program: Florida’s Nursing Student Loan Forgiveness Program repays $4,000 per year — for a maximum of four years — to licensed nurses that work in eligible state-operated medical facilities, public schools, or federally-sponsored community health centers. Payments through the program are exempt from federal income taxes, and Florida doesn’t have a state income tax.
4. Employer Student Loan Repayment Assistance Programs Are Currently Tax-Exempt
Impact: Your employer can contribute up to $5,250 per year toward your loans without affecting your taxable income.
To compete with other employers for the best workers, more companies are offering additional benefits like student loan repayment assistance. With these programs, the employer will typically match your student loan payments up to a percentage of your salary or a flat dollar amount. For example, an employer may pay up to 3% of your salary toward your loans a year, up to a lifetime maximum of $10,000.
A provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to contribute up to $5,250 toward employees’ student loan debt. President Trump’s President Trump’s One Big Beautiful Bill (OBBB) made this provision permanent, and it adjusted the contribution amount to keep pace with inflation. As a result, employers can contribute to workers’ student loan repayment without adding to the employees’ taxable income.
Does Student Loan Refinancing Affect My Taxes?
Student loan refinancing is a popular way to tackle your debt; you can potentially qualify for a lower rate and save thousands of dollars over the life of your repayment term. However, many borrowers worry that student loan refinancing will affect their taxes and cause them to owe more at tax time.
Thankfully, there’s good news: student loan refinancing isn’t taxable as income. It’s another loan, so it doesn’t have to be reported as income, and you don’t have to pay taxes on the amount you borrow. And you can still qualify for the student loan interest tax deduction or private student loan forgiveness after refinancing your loans.
Understanding how student loans and taxes are connected can help you prepare for the upcoming tax season and avoid surprises. If you need help with your tax return, meet with a credentialed tax preparer.
FAQs
Does paying student loans affect your tax return?
If you make payments toward your student loans, you may be able to deduct the interest you paid or $2,500, whichever is less, thanks to the student loan interest tax deduction.
Is student loan forgiveness taxable in 2026?
Student loan forgiveness may be taxable, but it depends on the program. Loans forgiven under PSLF are not taxable as income, but loans forgiven under IDR plans are.
Do you have to claim student loans on your taxes?
Student loans are a form of debt, not income, so you don’t have to report loans you take out on your taxes. But, if you make payments toward your loans, you may qualify for the student loan interest tax deduction.
