How a Student Loan Can Affect Your Taxes

Student loans are extremely helpful. Many people want to get that diploma they’ve been dreaming of for a while, and a student loan may be the only way to get it. But it’s all good until you’re done with your studies. You have the diploma, but you are left with the student loans.

Before you get a corporate tax attorney, it’s important to be aware of the different ways your student loan can affect your taxes. Let’s see how your student loan will influence you even after you graduate.

  • Student Loan Interest Is Deductible

Student loans are quite a burden, and the interest certainly doesn’t make the situation better. Luckily, the government is aware of this, and they can offer students an interest deduction. Through the deduction, the amount of interest you pay during the year can be reduced up to $2,500.

Of course, this is just for the paid interest, not the full loan payments you’ve done to be able to study. Also, to qualify for a loan deduction, the interest you pay must be for a qualified student loan, respectively one that you took out either for yourself, for your spouse, or a dependent for education costs. Expenses that qualify are books, room, tuition, and board during the time of the study.

  • Loan Forgiveness Might End Up in a Big Tax Bill

If you use the government’s Public Service Loan Forgiveness program or if you settle for an income-driven repayment plan, your federal student loans can be forgiven. These options have their own effects on your taxes, though.

If you managed to make 120 on-time loan payments while you were working full time at a non-profit or government agency, you will qualify for Public Service Loan Forgiveness. Even better, you will not have the forgiven amount taxed either.

But when it comes to a borrower on an income-driven plan, he/she will pay income tax on the forgiven loan balance the year the period of repayment ends. As a result, parents or grads who have high loan balances might deal with a very big tax liability.

  • Your Loan Payment Might Increase If Filling Jointly with a Spouse

A lot of grads go with income-driven repayment plans in order to repay their federal student loans, but these plans can put a limit on your monthly payment. It would be only a percentage of the discretionary income. After you make payments towards the loan for 20 or 25 years, your loan could also be forgiven.

However, how you file your taxes can affect the amount you owe through income-driven plans. Filing jointly with your spouse means that the payment will be for two combined incomes, so the bill might also get bigger, or might even disqualify you for some specific repayment plans if your income is very high.

This is why filing taxes separately might be better in this regard. But that may also have disadvantages, limiting your ability to contribute retirement savings to a Roth IRA and removing your possibility of making some tax deductions or credits.

Final Thoughts

If you have a student loan or you’re planning to get one, you should know how it will affect your taxes in the future. Get familiar with the effects before making the decision.

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