RESOURCES
Tax Benefits for Student Loan Borrowers and Students & Families
A guide to federal tax credits and deductions that can help you pay for higher education.
Tax Benefits For Student Loan Borrowers
Learn how federal tax benefits can reduce the cost of repaying student loans and help you manage your monthly payments.
Student Loan Interest Deduction
You may be able to deduct up to $2,500 in interest you paid on qualifying student loans during the tax year. This applies to loans taken out for yourself, your spouse, or a dependent, and includes both federal and private loans as long as they are used to pay for higher‑education expenses.
How do you do this? Get Form 1098-E from loan servicer, and report the amount as an adjustment to income on your federal tax return. You do not need to itemize deductions to claim it.
How Your Adjusted Gross Income (AGI) Can Affect Your Monthly Payments
If you’re enrolled in an Income‑Driven Repayment (IDR) plan, your monthly student loan payment is based on your Adjusted Gross Income (AGI). A lower AGI typically means lower monthly payments.
Contributing pre-tax income to certain accounts can lower your AGI, including:
- 401(k) contributions
- Traditional IRA contributions
- Health Savings Accounts (HSA)
- Flexible Spending Accounts (FSA)
Taxability of IDR Forgiveness After 2025
Under current law, student loan balances forgiven under IDR plans will become taxable starting in 2026. However, if you were eligible for forgiveness in 2025, but the discharge is not fully processed until 2026, it is still considered tax‑free at the federal level.
- Taxability of PSLF: According to the IRS, student loan amounts forgiven under PSLF are not considered income for tax purposes. Therefore, they are not taxable at the FEDERAL level. However, PSLF may be taxed at the STATE level depending on where you live. In NYS, Public Service Loan Forgiveness is not taxed at the state level.
If You’re Married: How Filing Status Impacts Payments
Your tax filing status matters if you’re on an IDR plan.
- Married Filing Jointly (MFJ): Combined income is considered which often leads to higher payments — but may also offer other tax advantages.
- Married Filing Separately (MFS): Payments only based on your income.
Use our free repayment calculator to compare payments under different income filing scenarios. For a more in-depth look at how your tax filing status can affect your student loan payments and timeline, visit our blog for married student loan borrowers.
Tax Benefits for Students and Families
Tax season is an opportunity for students and families to reduce education costs through federal tax credits and savings plans. Below are the key benefits to know about.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit provides up to $2,500 per eligible student, per year, for the first four years of higher education.
It can be claimed by parents for dependent students or by students who file their own tax return. This credit covers tuition, fees, and required course materials while the student is pursuing a degree or recognized credential.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit offers up to $2,000 per tax return for tuition, fees, and required books and supplies.
This credit is more flexible than the AOTC and it can be used for any year of education, including graduate programs, workforce training, and continuing education.
Coverdell Education Savings Account (ESA)
A Coverdell ESA allows families to save up to $2,000 per year for qualified education expenses. Funds can be used for elementary, secondary, and higher education, making it a versatile option for long‑term planning. Earnings growth and distributions are tax-free for qualified expenses.
Income restrictions apply to the contributor. Please find information here.
529 Plans (Qualified Tuition Programs)
A 529 Plan allows you to invest money for future education costs. Earnings grow tax‑free, and withdrawals for qualified education expenses are not federally taxed. Many states, including New York, offer additional tax benefits for contributions.
Please find information about the NYS 529 Plan here.
Need help figuring out which benefits apply to you?
Schedule a free 1:1 appointment with one of our counselors, or call our helpline at (888) 614-5004.
