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Will Student Loan Debt Affect Your Tax Return?

13 Sep Posted by in Newsletters | Comments
Will Student Loan Debt Affect Your Tax Return?
 

If you have student loans to repay, you may be wondering how that debt will affect your tax return. While repayment of the principal portion of your debt is not tax deductible, you can take an above-the-line deduction for up to $2,500 of interest that you pay in a year, as long as you meet certain conditions such as an income limit. “Above-the-line” means the interest deduction reduces your taxable income before you take other eligible expenses or your standard deduction into account.

What if you don’t repay your loans? If some or all of your debt is cancelled under a qualified program, you might not have to report the income. That may also be true for loan repayments made to you under specified state or federal programs. In general, however, when a student loan is forgiven, the amount you no longer have to repay is taxable income. Why? Because you have received an economic benefit equivalent to income. One other consequence of defaulting on, or failing to pay, your student loan: The IRS can apply your tax refund to the outstanding debt.

If you have questions about managing your student loans or other debt, please contact our office. We’ll help you learn your options.

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