Ah, the student loan. No fun to pay, but can it be fun to file? Tax time is where this expense can pay off, so our answer is yes! Whether you’re enrolled as a student or graduated long ago, higher education costs and student loans have a big impact on your tax return. Learn the ABCs to make tax filing as easy as 1, 2, 3.


Authorized Savings Plans

We can’t all rely on receiving grants and scholarships. Some lucky students have access to an IRS authorized savings plan, often funded by parents or relatives. These plans allow the contributor to grow money tax-free money in a college fund.

  • 529 PlanQualified tuition programs like the 529 Plan let you prepay or contribute to an account to be used toward eligible higher education expenses. They are not tax deductible, but are tax free and have no income limit.
  • Coverdell Education Savings Account (ESA)Your contributions to a Coverdell ESA are not deductible, but the amounts deposited into the account grow tax-free until you’re ready to distribute. Your yearly contribution cannot exceed $2,000. The Coverdell ESA can be used for higher education expenses, as well as elementary and secondary education.


Benefit Exclusions

Did you receive educational assistance benefits from your employer? It’s possible to exclude the benefit from your income so you don’t have to pay taxes on that amount.

  • Educational Assistance Less than $5,250If you received up to $5,250 from an educational assistance program, that income can be excluded on your taxes and will not be included on your W-2. There are certain requirements the plan must meet, so ask your employer if you’re part of a qualified program.
  • Educational Assistance Over $5,250If your employer pays more than $5,250 toward your educational expenses, that income will be taxed and will appear on your W-2. The only exception to this tax is a working condition fringe benefit, meaning that if you’d paid out-of-pocket, you could have deducted it as an employee business expense. 


Credits & Deductions

Here’s where it gets really good! Education credits can reduce the amount of tax owed on your return and the education deduction can reduce the amount of your income subject to tax.

  • American Opportunity CreditTo qualify, you must be pursuing a degree at least half time and your modified adjusted gross income (MAGI) can’t be over $90,000. This credit covers the student’s first four years of higher education with an annual credit of up to $2,500, plus up to $1,000 on the remaining credit amount.
  • Lifetime Learning CreditTo qualify, you, your spouse or a dependent must be enrolled as an undergraduate, graduate or professional degree student. Your MAGI cannot exceed $62,000. With this credit, students can get up to $2,000 per annual tax return.
  • Student Loan Interest DeductionIf your MAGI is less than $80,000, you can deduct interest paid on a student loan used for higher education. Your income subject to tax can be reduced by up to $2,500.


Do you have any tips on paying back student loans? Let us know in the comments below. DIY Tax makes it easy to claim your education credits and deductions, all while filing completely free!