When you use student loan funds to finance your education, the IRS allows you to claim qualifying expenses you pay with those funds for claiming educational tax credits. A tax deduction is also available for the interest payments you make when you start repaying your loan. Learn more about how student loans can affect your taxes.
American Opportunity credit
Students who are pursuing a course of study that will eventually lead to a degree and are in their first four years of school—or those who are paying for their educations—may be eligible to claim the American Opportunity credit.
- The credit covers the tuition payments you make, plus the cost of purchasing the books and supplies you need, as long as you maintain at least half-time status.
- When you use student loan funds to finance your education, the IRS allows you to include the expenses you pay with those funds in the credit.
Lifetime Learning credit
Students who have already finished their first four years of post-secondary study or who just take a course here and there to improve work skills can qualify for the Lifetime Learning credit.
- The credit is equal to 20% of your tuition and fees payments.
- Although the credit covers your tuition and fees, you may not include the cost of books and supplies unless the school requires direct payment for them.
- Just like the American Opportunity credit, the IRS allows you to claim the Lifetime Learning credit even if you use a student loan to pay for 100% of your tuition.
- For example, if you borrow and then pay $2,000 for your tuition, your credit will equal $400.
- $2,000 tuition payment x 0.20 (20%) = $400 credit
IRS Form 8863
For any tax year that you claim either of the tax credits, the IRS requires you to prepare a Form 8863 and submit it with your personal income tax return.
- You use this form to report your eligible school expenses and to calculate the credit.
- In most cases, your school will notify you of your eligible costs for the year before you prepare your income tax return.
Student loan interest deduction
The tax benefits of your student loan don’t end with these tax credits. A deduction is also available for the interest payments you make when you start repaying your loan.
- Although the amount you can deduct is limited each year, you can only deduct the interest on student loans you actually use to pay school-related expenses, including your room and board.
- Even if you use some of the funds for other personal expenses, such as to finance a vacation, the deduction is not entirely lost; you just need to reduce it accordingly.
If you use TurboTax to prepare your tax return, we’ll make sure to fill in all the right forms for you. You’ll just need to answer a few simple questions about your education expenses.
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