Repaying student loans might already be bogging you down. You may not be financially ready to buy a home or get married until you've paid off your student loans. But your student loans impact more than your future purchases -- they also affect your taxes.
Before you submit your taxes, make sure you know how your student loans can help -- or hurt -- your filing.
Student loan interest deduction
When you make monthly payments to your student loans, it includes your principal payment as well as your interest payment. Whether you have private or federal student loans, the student loan interest deduction lets you reduce your taxable income up to $2,500 a year. Although you might only qualify for up to the amount you paid in interest, which might be less than $2,500.
You're eligible for the deduction if you paid student loan interest last year and you aren't filing as "married filing separately." If you and your spouse are filing jointly, neither of you can be claimed as a dependent on someone else's return.
Reducing your taxable income can help lower how much you owe the government or increase how much you'll get as a refund. You might get placed in a lower tax bracket, which might qualify you for other deductions and credits.
Read more: Where to get free tax help
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is for first-time college students during their first four years of higher education. The credit is 100% of the first $2,000 of qualified education expenses for each eligible student, then 25% on the next $2,000.
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less. If you make between $80,000 and $90,000, you can still qualify for the credit, but you'll get a reduced amount.
If the credit lowers your income tax to less than zero, you might be able to get a refund on your taxes or increase your tax refund.
Read more: 12 of the best tax deductions in 2020
Lifetime Learning Credit
You can earn money back for qualified education expenses through the Lifelong Learning Credit. The LLC can help pay for any level of continuing education courses (undergraduate, graduate and professional degrees).
Unlike the AOTC, there's no limit to how many years you can claim the credit. You could get up to $2,000 every year or 20% on the first $10,000 of qualified education expenses. You can use the credit to lower your tax bill, but you won't get any of the credit back as a refund.
Your taxes determine your student loan payments
If you're repaying federal student loans, including those on an income-driven repayment plan, your marriage status can impact your payments. For instance, if you're married filing jointly, your payments are based on the new joint income between you and your spouse. If you're married filing separately, your payments are based on only your income.
The Revised Pay As You Earn (REPAYE) plan doesn't distinguish between whether you're listed as married filing separately or married filing jointly. Your payments are based on both you and your spouse's income.
While you might get a little bit of a break if you're married filing separately, you could miss out on other benefits. You may not be able to take advantage of a lower tax rate for married couples and claiming credits and deductions.
But if you do file as married filing jointly, you do get a little bit of a break. The government can adjust your payment if both you and your spouse are making repayments to your federal student loans.
Loan forgiveness could increase your tax bill
While you might have a huge student loan burden and you're hoping to reduce some of that through debt forgiveness, you might face a tax burden later on.
An income-driven repayment plan lets you make payments based on your monthly income and then, after 20 or 25 years, the remaining debt is forgiven. That forgiven debt becomes taxable income, which can increase what you pay come tax time. The exception is Public Service Loan Forgiveness (PSLF). After the remaining debt is forgiven, you aren't responsible for paying taxes on the discharged amount.
Student loans have ramifications long after you've left college
Taking out student loans to pay for school can be the determining factor between attending college and not. They can cover your finances when grants, scholarships, family contributions and other options are depleted. But remember that while student loans can cover you in the short-term, you'll be paying back far more than the original principal of the loan -- and likely for a very long time.
If you have the opportunity to find other financing options, you may want to. It's hard to imagine repaying student loans for decades, but many people already do this. If you're considering getting student loan forgiveness, pay attention to your taxable income. While you might qualify for credits and deductions, student loans may not always help you come tax time.