Tax Benefits for Education

December 9, 2023

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Qualifying taxpayers can benefit from tax credits and tax deductions. Below we discuss two of these benefits, but there are others. To learn about all tax benefits for education and to determine if you qualify, review IRS Publication 970.

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Student Loan Interest Deduction

If you made federal student loan payments for the tax year, you may be eligible to deduct a portion of the interest you paid on your federal tax return. Your federal loan servicer (who you made payments to) will send you a 1098-E or you can download it from your loan servicer’s website.

This deduction allows qualified individuals to deduct interest paid on their student loans from their taxable income.  The amount of the deduction is phased out (gradually reduced) when your modified adjusted gross income (MAGI) reaches the annual limit for your filing status.

Qualified student loans must have been used for educational expenses such as tuition and fees, room and board, books, supplies, and equipment, as well as other necessary expenses such as transportation. Additionally, the student must have been enrolled at least half-time in a degree-granting program. 

In addition to the interest on the loan, if all requirements are met, it is possible that the loan origination fee, capitalized interest (unpaid interest that is added to the principal balance of the loan), and interest on consolidated loans (and sometimes refinanced loans or revolving lines of credit) can also fall within the student loan interest deduction benefit. 

The Student Loan Interest Deduction is taken as an adjustment to income, which means you can claim the eligible deduction even if you do not itemize deductions when filing your federal income taxes. For additional details, qualifications, and more information, refer to the Student Loan Interest Deduction section of IRS Publication 970.

Lifetime Learning Tax Credit

This credit allows you to reduce your tax bill on a dollar-for-dollar basis. The amount of your credit is gradually reduced when your modified adjusted gross income (MAGI) reaches the annual limit for your filing status, see Publication 970 for details. There is no limit to the number of years this credit can be claimed, but there are income limits.

The credit is available for qualified expenses of tuition and fees required for enrollment. Qualified expenses include tuition and fees, including student activity fees, books, supplies, and equipment – if paid to the school. To determine your lifetime learning credit, you should receive Form 1098-T (Tuition Statement) from your eligible educational institution for the tax year. 

You can’t claim the lifetime learning credit if your tax filing status is “married filing separately” or if you are listed as dependent on another person’s tax return. To learn more, visit the IRS’s Tax Benefits for Education: Information Center.

Tax Considerations for Loan Forgiveness

Loan amounts forgiven through PSLF are not taxable; however, loan amounts forgiven by reaching the end of the repayment term for an income-driven repayment plan are taxable.

The American Rescue Plan Act of 2021 did modify the treatment of student loan forgiveness for discharges in 2021 through 2025. See Publication 970 for more information about this topic.

This material is provided for general information only. Please see your tax advisor for details about other tax-related educational benefits and for information regarding your specific tax situation.

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