For many students, securing financing for their education is the first major financing event of their lives—and it can feel overwhelming.
On top of sorting out whether you’re eligible for federal student loans and the difference between subsidized and unsubsidized loans, you may be confused about whether student loans count as income. In a nutshell, the answer is no, student loans are debt, and do not count as income.
Fellowships and other forms of financial grants, however, may be counted as income, depending on how the funds are spent. And loans that are forgiven have counted as income.
Read on for more about the tax implications of student loans, grants, and student loan repayment. Of course, this is just a helpful guide as you begin to explore the basics of student loans and taxes; always seek out a tax professional to help you with your specific situation.
Are Student Loans Taxable?
There are multiple types of student loans—each with their own unique terms. As noted earlier, though, student loans are not taxed as income.
This is true of other types of loans generally as well, like credit card spending, mortgages, and personal loans (unless the loan is forgiven)—basically most credit that needs to be repaid. The IRS considers student loans a form of debt—not income—therefore, it is not taxed.
The only time that student loans (or other types of debt) can be taxed is if they are forgiven during repayment. If you are eligible for a federal student loan forgiveness program and have met the requirements (which vary, and may include stipulations like making eligible payments for 20 to 25 years via an income-driven repayment plan or completing eligible public service work/payment requirements, and others), the remaining balance on your student loans (the amount forgiven) may be taxed as income, depending on the repayment plan. This could amount to a hefty tax bill.
Are Scholarships Taxable?
The high-level answer to this question is: it depends. There are many different forms of scholarships, grants, and fellowships that are awarded to students to cover the costs of studying and research. Some are need-based and some are merit-based. The basic difference between scholarships and loans is that a scholarship is given while a loan is borrowed. You won’t typically have to pay back a scholarship, but you do have to pay back a loan.
Most scholarships are not taxed when you are enrolled in a formal educational institution and the scholarship is directly used to cover the costs of tuition, fees, books, and supplies used for study.
There are some situations in which scholarships can be taxed, however. For instance, a scholarship can be taxed as income if you use it to cover what are considered “incidental” expenses related to your education such as travel, room and board, and supplementary equipment and supplies.
Another type of scholarship that can be taxed is a scholarship that has a service-related requirement to it. This frequently applies to scholarships for graduate students. If you are required to teach, provide research assistance, or perform other services as a condition of your scholarship, it can be taxed as income and you will be required to report the scholarship as part of your gross income.
(For more about which types of scholarships are considered income and what scholarship-related activities are taxable, check out IRS Publication 970 .)
Does Financial Aid Come with Any Tax Benefits?
Student loans aren’t usually taxable as income, and in fact may come with a tax benefit that is meant to make repayment a little easier on borrowers investing in their education. The Student Loan Interest Deduction allows you to deduct the amount of interest you have paid on your student loans up to a maximum of $2,500 per year, if your modified adjusted gross income is less than $80,000 (or $160,000 for joint filers.)
For instance, let’s say you have $30,000 in federal student loans with a 7% interest rate on that amount over a standard repayment period of 10 years. On the Standard Repayment Plan, your monthly payment could be about $350, of which roughly $175 is interest. So, in your first year of repayment, you could be paying about $2,100 in interest. In this scenario, you may be eligible to deduct that from your annual gross income, meaning you could pay less in taxes. This deduction can also help defray some of your repayment costs.
How Can I Make My Student Loan Repayment Easier?
The costs of student loans come in the form of the interest you pay each month on what you borrow. The example above, of a $30,000 loan with a 7% interest rate, shows just how much student loan borrowing can cost you per year. Over a standard repayment period (10 years), you would hypothetically pay roughly $11,800 in interest in addition to repaying the $30,000 principal.
So what can make repayment easier, other than the student loan interest deduction? One option is to refinance your student loans with a private lender.
If you already have private and/or federal student loans, you may be able to refinance your student loans at a lower interest rate than you currently are paying. If you are eligible to refinance your student loans, you could shorten your term length, qualify to lower the interest rate on your loans, or possibly lower your monthly payment (by extending your term). But there can be some drawbacks to think about.
For instance, federal student loans come with several benefits and protections such as forbearance, deferral, and income-driven repayment plans that private loans do not offer. If you think you might need some of these benefits, or if you are eligible for student loan forgiveness, it might not be the right time to refinance.
However, if you have a steady income and good cash flow—along with other aspects of your financial picture that are appealing to a lender—and you are ready to focus on paying down your loans, refinancing might be the right solution for you.
SoFi is a leader in the student loan space, offering refinancing options to help you save on the loans you already have.
Generally, student loans are not considered income, so are not taxed. The exception is when your federal student loan is forgiven. In that case, the IRS may count the cancelled debt as taxable income. Educational grants and scholarships, on the other hand, may or may not count as income. Typically, they are taxed when they are spent on expenses outside of tuition and fees, such as room and board and travel.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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