The Tax Ramifcatiions of Student Loan Repayment

You may be able to deduct the interest you owe on your student loan repayment plan from your taxes. This depends on the salary you are earning in a given year and how you report your taxes. Being aware of this issue before you elect your repayment plan can result in large savings on your loan in the long run.

Qualifying for an Interest Deduction

There are four main criteria for deducting interest paid on student loans:

  1. First, you have to be able to prove you paid interest on a qualified student loan during a given tax year. A qualified loan is used to pay for higher education. Form 1040 will help you determine if your loan qualifies.
  2. You are not filing separate from your spouse; only married couples filing jointly can deduct the interest
  3. Your income is below the threshold; this threshold was $70,000 in 2009 for an individual or $145,000 for a couple
  4. You are not claimed as a dependent on another person's tax return

If all of these are true, then you can claim the deduction. You do not need to itemize the deduction on a Schedule A because it will actually be an income adjustment as reported on a Schedule C.

Reporting Forgiven Debt

You should be aware of the law regarding debts forgiven or discharged. When you take a loan, you are actually being given money, which can technically qualify as income as far as the IRS is concerned. However, since a loan must be paid back, you are never taxed on this income. When a loan is forgiven, the income is actually counted for a number of debts. For example, if you used the money to purchase a home, you were given equity without having to repay a debt. You may then have to pay taxes on the forgiven loan sum. For a student loan, this sum may not be taxable.

Maximizing a Deduction

You do not have the option of filing jointly after you are married and still claiming the deduction if you make more than $145,000 as a couple. It may be a reasonable tax strategy to wait to get married if your spouse's salary would disqualify you from deducting your student loan debts. Thinking practically about how to report your taxes without misreporting is the key to minimizing your tax liability while still staying within your legal rights. An accountant may be your best advocate in deciding how to handle student debt come tax time.

Avoiding Fraud

There is a fine line between tax minimization and tax fraud or evasion. Minimization includes all legal strategies to reduce your tax liability. Evasion, on the other hand, means intentionally structuring earnings so they are less taxable or simply not reporting earnings. Finally, fraud is a word used to describe intentionally misreporting tax information. Minimization is the only legal tax strategy. You cannot neglect to report income in order to stay below the reporting threshold for your student loan interest deduction. Similarly, you cannot fail to report marriage in order to keep the benefit.


Need a Student Loan? Click here!