Savanna Hoffman
Student loan debt is a burden shared by many, and while bankruptcy can discharge student loan debt, it is a challenging process. Student loan payments and interest have special tax treatments, and in some cases, it is possible to write off student loan interest payments. For example, in the US, up to $2500 of interest can be written off for those earning less than $85,000. Additionally, certain programs and education-based nonprofits offer awards to help borrowers pay off their debt. In the UK, student loans are sometimes written off or cancelled, depending on the borrower's circumstances, such as disability or death.
| Characteristics | Values |
|---|---|
| Student loan interest deduction | Up to $2,500 for tax years 2024 and 2025 |
| Student loan interest deduction eligibility | Single filers with MAGI less than $85,000 and married filing jointly with MAGI less than $170,000 |
| Student loan interest deduction for companies | Companies can set up Student Loan Assistance Programs to pay up to $5,250 of student loans for regular employees annually |
| Student loan repayment plans | Plan 1 loans are written off 25 years after the April the borrower was first due to repay or when the borrower turns 65. Plan 2 loans are written off 30 years after the April the borrower was first due to repay. |
| Student loan cancellation | The Student Loans Company (SLC) can cancel a student loan in the event of the borrower's death or if the borrower claims certain disability benefits |
| Student loan forgiveness | The IRS may consider forgiven debt as income. As of December 31, 2025, tax-free federal loan forgiveness ends federally. |
| Student loan discharge in bankruptcy | Student loans can be discharged in bankruptcy, but it is more difficult than with other debts |
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What You'll Learn
Student loan interest deduction
Student loan interest tax deduction can help you save money as you repay your loans. Student loan interest is the cost of borrowing money to pay for your education. When you take out a student loan, you agree to repay the loan amount (the principal) plus interest, which is calculated as a percentage of the unpaid principal balance.
Student loan interest is tax-deductible, but only up to a certain limit. In the US, federal student loan borrowers can deduct the lesser amount of either $2,500 or the amount of interest they actually paid during the year. This deduction is gradually reduced and eventually eliminated when the modified adjusted gross income (MAGI) amount reaches the annual limit for the individual's filing status. For instance, for the 2024 tax year, if you're filing as Married Filing Jointly, you can deduct up to $2,500 of paid student loan interest if your MAGI is $165,000 or less. The deduction is completely eliminated if your MAGI is $195,000 or more.
To claim the deduction, you must have paid interest on a qualified student loan, be legally obligated to pay interest on that loan, have a filing status that is not married filing separately, and have a MAGI below a specified amount. A qualified student loan is one that you took out solely to pay for higher education expenses for yourself, your spouse, or a dependent.
It is important to note that this deduction is an adjustment to income, so you don't need to itemize your deductions to claim it. Additionally, if you paid $600 or more in interest during the year, your lender should provide you with a Form 1098-E, Student Loan Interest Statement, to help with your tax filing.
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Income limits and phaseouts
The student loan interest deduction is an above-the-line tax break that you can claim on Form 1040 or Form 1040A, regardless of whether you itemize your deductions or take the standard deduction. The deduction lowers your taxable income and, in some instances, could lower your tax bracket. The maximum deduction you can take is based on an income limit for each filing status.
If you are a higher-income taxpayer, the student loan interest tax deduction is reduced or eliminated. In other words, you cannot claim the deduction if your modified adjusted gross income (MAGI) is above the income limit. The deduction is gradually reduced and eventually eliminated by phaseout when your MAGI amount reaches the annual limit for your filing status.
For tax years 2024 and 2025, you can write off up to $2,500 of paid interest. If you are married and filing jointly, you can deduct up to $2,500 of paid student loan interest if your modified adjusted gross income (AGI) is $165,000 or less. Your student loan deduction is gradually reduced if your modified AGI is more than $165,000 but less than $195,000.
If your employer offers student loan payments as a benefit, you cannot claim any amount they paid towards interest that was excluded from income.
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Student loan forgiveness and taxable income
Student loan forgiveness can be a double-edged sword. While it may provide relief from the burden of debt, it can also result in unexpected tax consequences. This is because, in the eyes of the IRS, loan forgiveness may be interpreted as income. This means that the forgiven amount could be considered taxable income, leading to a potential tax liability.
The tax implications of student loan forgiveness vary depending on the specific circumstances and the applicable tax laws. In some cases, loan forgiveness may be tax-exempt. For example, under most federal student loan programs, if borrowers follow the rules and make all their payments, the forgiven balance is typically tax-free. Additionally, student loan forgiveness in cases of death or disability is generally not taxed. Furthermore, if your employer offers student loan assistance and makes payments towards your debt, this is usually not considered taxable income.
However, for borrowers on income-driven repayment plans, the story may be different. If your student loan debt is forgiven under an income-driven repayment plan, the forgiven amount may be subject to taxes. This means that you could end up with a substantial tax bill at the end of your repayment period. This tax burden can be significant, potentially ranging from $7,000 to $12,000, according to one expert.
It's important to note that the tax treatment of student loan forgiveness has been a subject of debate and legislative changes. The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. However, subsequent legislation, such as President Donald Trump's "big beautiful bill", did not extend or make permanent this provision. As a result, borrowers who benefit from debt cancellation under income-driven repayment plans could face federal taxes on the forgiven amounts starting in 2026.
To mitigate the potential tax impact of student loan forgiveness, it is crucial to understand your specific situation and seek professional tax advice. By staying informed and planning ahead, you may be able to minimize any unexpected tax consequences and make informed decisions about your student loan repayment strategy.
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Qualified student loans
A qualified student loan is a loan taken out solely to pay for qualified higher education expenses. This includes expenses incurred for oneself, one's spouse, or a dependent. To qualify, the expenses must be incurred within a reasonable period of time before or after taking out the loan, and the education must be provided during an academic period for an eligible student.
Student loan interest is tax-deductible for those who have paid $600 or more in interest on a qualified student loan during the year. The maximum deduction is $2,500, or the amount of interest paid during the year, whichever is less. This deduction is gradually reduced and eventually eliminated when the modified adjusted gross income (MAGI) amount reaches the annual limit for the individual's filing status. To claim this deduction, one must not be married and filing separately, and their MAGI must be less than a specified amount, which is set annually. Additionally, neither the individual nor their spouse can be claimed as dependents on someone else's return.
It is important to note that the student loan interest deduction is an income adjustment, and one does not need to itemize their deductions to claim it. This deduction is available to those who file taxes as sole proprietors or include their business profits in their personal tax returns. However, shareholder-employees of S-Corps are not eligible for this deduction, as they are considered to have too much financial power within the company.
While student loan payments cannot be written off, the interest paid on these loans may be tax-deductible, providing some financial relief to borrowers.
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Student loan assistance programs
- Income-Driven Repayment (IDR) Plans: IDR plans offered by the government base your monthly loan payment on your income and family size. Under these plans, your monthly payment can be as low as 10% of your discretionary income. After a certain number of payments over 20 or 25 years, the remaining balance on your student loans may be forgiven.
- Public Service Loan Forgiveness (PSLF): This program is designed for borrowers working in public service, education, or lower-income jobs. If you work full-time for a government or not-for-profit organization, you may qualify for forgiveness of the entire remaining balance of your Direct Loans.
- Teacher Loan Forgiveness: Teachers who serve in low-income schools or educational service agencies may be eligible for forgiveness of up to $17,500 if they teach full-time for five consecutive academic years.
- Military Repayment Assistance: The Servicemembers Civil Relief Act (SCRA) and the military's repayment assistance programs help active-duty military members manage their student loan debt. These programs offer benefits such as loan deferment, forbearance, interest suspension, or cancellation.
- State-Specific Loan Forgiveness Programs: Many states offer their own loan forgiveness programs to attract workers to high-need professions, including healthcare, teaching, and public service. Each state has its own criteria and benefits, so it's worth researching what your state may offer.
- Employer-Provided Student Loan Assistance: Some employers recognize the burden of student loans and offer repayment assistance as part of their benefits package. This assistance can vary but typically involves contributing a certain amount annually toward an employee's student loan repayment.
- Disability Discharge: If you have a physical or mental disability that severely limits your ability to work, you may qualify for a Total and Permanent Disability (TPD) discharge. This means you won't have to repay your federal student loans and may be released from certain grant service obligations.
- Closed School Discharge: If your school closes while you're enrolled or soon after you withdraw, you may be eligible for a discharge of your federal student loans. This program recognizes the potential harm caused by unexpected school closures, and relief is available if certain requirements are met.
Remember, each program has its own specific eligibility criteria and application process. It's important to carefully review the requirements and consult official sources or seek professional advice to determine which programs you may qualify for and how to apply.
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Frequently asked questions
Student loan payments made by your S-corp will be considered owner distributions and are therefore not deductible. However, if you are a sole proprietor or file your business profit in your personal tax return, you may be able to deduct student loan interest payments on Schedule 1, Part II, Line 21 of your personal tax return.
A qualified student loan is a loan taken out solely to pay for higher education expenses for you, your spouse, or a dependent. It must be used for education during an academic period and paid or incurred within a reasonable time before or after taking out the loan.
For tax years 2024 and 2025, you can write off up to $2,500 of paid interest if your modified adjusted gross income (MAGI) is less than $85,000 as a single filer or $170,000 if married filing jointly.
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