Your financial aid package will most likely have a mix of financial award types, such as grants, scholarships, and loans. Each of these awards will have separate tax consequences and are treated differently on your federal tax return. Federal student loans are not considered taxable income.

Not Taxable Income

Though it may seem as though you should claim your student loan as “income,” since you are receiving money, you ​​are not​​ receiving money - you are​​ borrowing​​ it. The money that you receive from student loans is not yours, it is money that you will have to pay back ​​with interest​​!

Tax Benefits

There are two education credits currently available to help offset the costs of a higher education by reducing the amount of your income tax. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself.

These credits are available if you are paying your education costs yourself or your parents are paying these costs for you as their dependent. Only one of you can claim the credit.

Tip

Note: To Claim Either of these Credits you will have to complete IRS Form 8863

American Opportunity Credit

​Tax Benefit - ​

  • Up to $2,500 for adjusted qualified education paid for each student who qualifies for the credit.

  • Available for four (4) tax years per eligible student.

Lifetime Opportunity Credit

​Tax Benefit - ​

  • Up to $2,000 for qualified education expenses paid for all eligible students.

  • Available for an unlimited number of tax years

Tip

Please refer to IRS Publication 970 - Tax Benefits for Education for more information

Related Articles

References

Writer Bio

Kimberley McGee is an award-winning journalist with 20+ years of experience writing about education, jobs, business trends and more for The New York Times, Las Vegas Review-Journal, Today’s Parent and other publications. She graduated with a B.A. in Journalism from UNLV. Her full bio and clips can be seen at www.vegaswriter.com.