Student Loan Tax Benefits

Read IRS Publication 970, Tax Benefits for Education to see which federal income tax benefits might apply to your situation. Here are some highlights:

Tax Credits for Higher Education Expenses

Two tax credits help offset the costs (tuition, fees, books, supplies, equipment) of college or career school by reducing the amount of your income tax:

  • The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential.
  • The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required for the course and had to be purchased from the school.

Even if you normally wouldn’t file a tax return because of your income level, be sure to do so! If you don’t, you’ll miss out on tax credits that would put money in your pocket.

Coverdell Education Savings Account

A Coverdell Education Savings Account allows up to $2,000 a year to be put aside for a student’s education expenses (elementary, secondary, or college).

Qualified Tuition Programs (QTPs; also known as 529 Plans)

A QTP/529 plan is established by a state or school so that you can either prepay or save up to pay education-related expenses. Once you’re in college or career school and you withdraw money from your account to pay your education expenses, the money you withdraw will not be taxed. Learn more about state 529 plans. To find out whether the college you plan to attend participates in a QTP, ask the financial aid or admissions staff.

Student Loan Interest Deduction

You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.

Using IRA Withdrawals for College Costs


UPDATE (March 4, 2014): President Obama’s 2015 Proposed Budget (Not Law Yet):


The President’s highest priority is to ensure economic opportunity for all Americans.  In his first term in office, he cut taxes by $3,600 for a typical middle-class family, and in 2012 he fought to keep taxes low for 98% of households while asking the wealthy to pay the same rates as in the 1990s.  But the President believes there is much more to be done. This year’s Budget would:

  • Strengthen the Earned Income Tax Credit (EITC) and Child Tax Credit: The EITC and refundable Child Tax Credit are among our most effective tools for reducing poverty and rewarding work. This year’s Budget proposes to:
    • Significantly Strengthen the Childless Worker EITC: The President’s Budget significantly strengthens the childless worker EITC, benefiting 13.5 million workers. This expansion would address an important missed opportunity in the EITC – identified by economists of both parties – to provide support and an additional incentive to work to childless adults, while also making it available to younger workers who are currently excluded. This expansion – which would lift about half a million people above the poverty line – would be paid for by closing tax loopholes that let high-income professionals avoid the income and payroll taxes everyone else has to pay.
    • Make Permanent Important Improvements the President Has Already Achieved: The Budget also makes permanent important EITC and Child Tax Credit improvements that help 16 million families with 30 million children, and have helped lift 1.4 million Americans out of poverty.
  • Expand and Improve Tax Benefits that Help Middle-Class and Working Families:
    • Pay for Child Care:  Families with young children know how high the cost of childcare can be – and how it often keeps a parent from full-time work.  The Budget proposes a significant expansion of the Child and Dependent Care Tax Credit, targeted to families with children under the age of 5.  About 1.7 million families would benefit from this expansion in 2015, receiving an average tax cut of more than $600.
    • Save for Retirement:  Too many households know they should be saving for retirement but lack access to employer-sponsored plans like 401(k)s, which puts the onus on individuals to set up and invest in an Individual Retirement Account (IRA).  Complementing the President’s myRA executive action, the Budget proposes to establish automatic IRAs (or auto-IRAs), which will expand access to and build on proven best-practices in the private sector to encourage workers to save.  About 13 million workers would begin contributing to retirement savings through auto-IRAs as a result of this proposal.
    • Pay for College:  Education has never been a more important part of the path to opportunity and the middle class, and the President believes that we should do all we can to help students and their families afford college.  That’s why this Budget would:
      • Permanently Extend the American Opportunity Tax Credit (AOTC), which will benefit 11.5 million families and students by an average of more than $1,100.
      • Simplify Taxes for Pell Grant Recipients, benefiting nearly all of the approximately 9 million Pell grant recipients by clarifying AOTC rules and simplifying calculations and providing some with a reduction in taxes or a boost to their AOTC.
      • Provide tax relief to student loan borrowers by excluding student loan forgiveness from taxation for borrowers who have made student loan payments for many years under an income-related repayment plan.