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Filing Taxes With Student Loans: Top Tax Breaks That Can Help You Get a Larger Refund

Don't pay more than you owe -- if you have student loan debt, you may qualify for tax deductions and credits.

Stacks of 100-dollar bills
Aleksandr Zubkov/Getty Images

This story is part of Taxes 2022, CNET's coverage of the best tax software and everything else you need to get your return filed quickly, accurately and on-time.

Over 43 million Americans have student loan debt and if you're one of them, you may not know that there are certain tax credits and deductions you may qualify for. As the April 18 tax deadline fast approaches, you'll want to know how your student loans may help you receive a bigger refund or lower your tax bill.

With federal student loan repayments now on pause through August, loan forgiveness being extended to even more Americans in public service positions and rumors of student debt cancellation circulating, there's a lot to keep track of this year. Here's everything you need to know about filing your 2021 taxes if you have student loan debt, including tax breaks, how the freeze impacts loans in default and why your tax filing status may lower or raise your monthly student loan payments.

Deduction for student loan interest

When you make monthly payments to your student loans, that includes your principal payment as well as any accrued interest payments. 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 -- depending on how much interest you paid.

You're eligible for the deduction if you paid student loan interest in 2021 and your modified adjusted gross income (your adjusted income after eligible taxes or deductions) is less than $70,000 (or $100,000 if you're married, filing jointly). You may be eligible for a partial deduction if your MAGI is between $70,000 and $85,000 ($100,000-$170,000 for those filing jointly). 

With federal student loan repayments on pause and interest at 0%, you might not have paid any interest over the past year. That said, you should log into your student loan portal and check form 1098-E for any eligible interest payments.

If eligible, this deduction will lower your taxable income, which could reduce how much you owe the IRS or increase your tax refund. You might even get placed in a lower tax bracket, which could qualify you for other deductions and credits .

American Opportunity Tax Credit

The American Opportunity Tax Credit is available for first-time college students during their first four years of higher education. It allows you to claim 100% of the first $2,000 of qualifying education expenses, then 25% on the next $2,000 spent -- for a total of up to $2,500. If you're a parent, you can claim the AOTC per eligible student in your household, as long as they're listed as a dependent.

To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less for those married, filing jointly). If your MAGI is between $80,000 and $90,000 ($160,000 to $180,000 for those filing jointly), you can still qualify for a partial credit.

The AOTC is a refundable credit, which means if it lowers your income tax to less than zero, you might be able to get a refund on your taxes or increase your existing tax refund.

Lifetime Learning Credit

You can earn money back for qualified education expenses through the Lifetime Learning Credit. The LLC can help pay for any level of continuing education courses (undergraduate, graduate and professional degrees). Transportation to college and living expenses are not considered qualifying expenses for the LLC.

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. The LLC is not refundable, however, which means you can use the credit to lower your tax bill if you have one, but you won't get any of the credit back as a refund. 

You're eligible for this credit if you have qualifying expenses and your MAGI was less than $59,000 ($118,000 for those married, filing jointly). You can claim a reduced credit if your MAGI was between $59,000 and $69,000 ($118,000 and $138,000 for those married, filing jointly). 

Note: You cannot claim both the AOTC and the LLC for the same student in the same tax year. If you're eligible for both, the AOTC typically provides a bigger tax break (and can boost your refund).

Loan forgiveness is not taxable (right now)

As part of the $1.9 trillion COVID relief package passed in March 2021, borrowers who receive loan forgiveness no longer owe taxes on the forgiven amount through 2025. Prior to this legislation, most borrowers who received forgiveness would be required to pay income taxes on the dismissed amount. That's great news if you're one of the 70,000 borrowers who received loan forgiveness through the expanded Public Service Loan Forgiveness program.

Refunds won't be garnished if federal student loans are in default 

Normally, if you have federal student loans in default (meaning you're unable to pay what you owe on them for 270 days), your tax refunds can be taken to help cover the balance owed. However, this tax season, federal student loan deferment remains on pause through Aug. 31, 2022. This temporarily puts student loan payments, interest and any collection activities, including taking your federal tax refund to pay your defaulted student loans, on hold. 

Your tax filing status can affect your student loan payments

If you're repaying federal student loans, including those on an income-driven repayment plan, your marriage status may impact your payment amount if you're on an income-driven repayment plan. 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, or REPAYE, plan doesn't distinguish between whether you're listed as married filing separately or married filing jointly. Your payments are based on the income of both you and your spouse. So, if you're filing jointly for the first time this year, you can expect your monthly payment to increase.

While you might be able to sidestep this if you're married and decide to file separately, you may miss out on other key tax benefits. For example, you may not be able to take advantage of a lower tax rate extended to married couples filing jointly, nor will you be able to claim increased credit and deduction amounts available if you filing jointly.

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