Credits, Write-offs, & Tax Breaks for College Students
Are you up to date on the tax breaks and deductions available to college students? Get the rundown—and get ready to cash in—with the latest tips and guidelines.
We all know that college can be a major investment. With the average cost for tuition and fees topping $10,560 for a public college and $37,650 for a private institution in the 2019-2020 school year, it’s clear to see why students are on the hunt to save wherever they can. As the cost of college rises each year, knowing all of your options for savings on tuition, fees, books, and supplies can save you hundreds—or maybe even thousands—of dollars.
Luckily, there are many ways to save as a student. The problem is that most students don’t know about their options. Whether it’s a tax break, credit, or write-off, these sometimes seemingly small savings can really add up in the long run. Learn all the ways you can save as a student and get the information you need to make higher education affordable for you.
Tax Credits & College: What You Need to Know
Whether you’re enrolled as an independent or dependent learner, the federal government provides tax credits to help reduce taxes for individuals and their families while enrolled in college. Here’s how to take advantage of those tax credits.
What are tax credits?
Tax credits help students lower their tax burden by reducing the actual amount of taxes owed. While deductions reduce the amount of income that can be taxed, tax credits reduce the overall tax burden, leading to a more direct reduction. Tax credits for college students and can be used for approved expenses.
How can students take advantage of tax credits?
Students, parents, and spouses who pay qualified education expenses at an eligible college or university can take advantage of specialized tax credits if they have a social security number or individual taxpayer identification number.
Tax credits for college students
The Internal Revenue Service currently offers two types of educational tax credits. These include the American Opportunity Tax Credit and the Lifetime Learning Credit. Expenses that may qualify for tax credits include tuition and fees, student loan interest, student loans, and education expenses.
The American Opportunity Credit
Individuals can use the American Opportunity Tax Credit on qualified educational expenses from the first four years of higher education. Eligible students must be enrolled in an approved educational program, take classes on at least a part-time basis, not have a felony drug conviction, and not take advantage of the program for more than four years.
Who’s it for?
Both independent and dependent students can claim this tax credit if they have a Form 1098-T Tuition Statement from their college. Students can be enrolled in a degree or other qualified education credential.
What’s the value?
Qualifying students can receive credits of up to $2,500 per year. The credit covers 100% of the first $2,000 in approved expenses and 25% of the second $2,000 in expenses, totaling $2,500. If the credit brings your tax burden to $0, you can receive up to 40% of the remainder (up to $1,000) as a tax refund.
The Lifetime Learning Credit
Unlike the American Opportunity Tax Credit, which offers a maximum of four years’ worth of tax credits, the Lifetime Learning Credit (LLC) does not set a limit on how many years qualified students can take advantage of the discount. Applicants must enroll at an approved educational institution and take courses that lead to a degree, credential, or demonstrably improved job skills.
Who’s it for?
Because individuals can use the Lifetime Learning Credit for an unlimited number of years, undergraduate, graduate, and professional degree seekers use this credit to help lower their taxes. To receive the LLC, you must provide a Form 1098-T Tuition Statement to the IRS.
What’s the value?
The LLC allows you to claim up to $2,000 in qualifying educational expenses per tax return. Qualifying expenses include tuition and other related costs of higher education. The LLC does have income limits for eligible students.
Tax Deductions: Can Students Write-Off the Cost of College?
Tax deductions make it possible for students and their families to write off portions of the cost of college. While you won’t be able to write off the entire cost, there are several different types of deductions that can help you get the maximum write-off.
Tax credit options such as the American Opportunity Tax Credit and Lifetime Learning Credit allow you to deduct portions of tuition and fees, books, supplies, and equipment but cannot be used on things like room and board, transportation, health insurance, or student loan interest payments.
Students should also note that other types of deductions can also be used to reduce other parts of typical college expenses, including student loan interest both while in school and after graduating. Keep reading to find out how to take advantage of this deduction.
Tuition and Fees Deduction
The Internal Revenue Service phased out the tuition and fees deduction after 2020, but qualified students who were enrolled during that time (or before) can claim the deduction. In addition, students can still use the American Opportunity Tax Credit and Lifetime Learning Credit for tuition and can retroactively apply for deductions from older tax returns.
Who is eligible to deduct tuition and fees?
Until December 2020, undergraduate and graduate students qualified for this deduction as long as they attended a qualified institution and didn’t earn more than the maximum modified adjusted gross income. Married students who file separately were not eligible.How can I deduct tuition and fees from my taxes?
The Internal Revenue Service phased out the tuition and fees deduction after 2020, but qualified students who were enrolled during that time (or before) can claim the deduction by filing an amended tax return and receive a credit of up to $4,000. Use Form 1040-X, Amended U.S. Individual Income Tax Return, and plan for the process to take approximately four months to complete. If you weren’t enrolled during that time, use the American Opportunity Tax Credit and Lifetime Learning Credit for tuition tax credits.
The Student Loan Interest Deduction
The IRS allows students and/or their families paying on a qualified student loan to deduct a certain portion of the interest per tax cycle. This type of deduction is only available to those with qualifying modified adjusted gross income, meaning those who make too much money each year cannot take the deduction. Under current rules, you can deduct either $2,500 or the amount of interest paid throughout the year, whichever number is lower. Qualifying deductions include both mandatory payments and voluntarily prepaid interest.
Who is eligible to deduct student loan debt?
Regardless of academic level or enrollment status, all individuals with student loan debt repayment plans can qualify for this deduction if the loan is solely related to higher education costs for themselves, their spouse, or a dependent. Individuals must have made payments toward their student loans that included interest in the tax year for which they seek the deduction. They must also not identify as married filing jointly or earn more than the maximum modified adjusted gross income.How can I deduct student loan debt from my taxes?
If you paid $600 or more in interest on an eligible student loan during the previous tax cycle, the institution you borrowed the money from should send you a Form 1098-E Student Loan Interest Statement. You can then submit this document to the IRS as part of your tax filing. If you paid less than $600, you can deduct interest without the 1098-E form, provided you meet all other requirements.
Other Ways to Save as a Student
If you don’t qualify for a tax credit or deduction–or want to find even more ways of saving on the cost of college for yourself or a loved one–plenty of other options exist. Whether you want to start a 529 savings account for your newborn or take advantage of the education savings bond program as a nontraditional learner, take a look at a few common options below.
529 Savings Plan
Existing in all 50 states and Washington, DC, 529 savings plans, also known as qualified tuition plans, help cover tuition costs for dependents by providing sponsorship from state governments, agencies, or educational institutions. They come in two forms: prepaid tuition plans (PTPs)and education saving plans (ESPs).
PTPs allow individuals to purchase college credits at participating public schools at the current price for future students. ESPs, conversely, enable individuals to open investment accounts that they can use for tuition, fees, and room and board in the future. These can be used at any higher education institution and provide rates of return similar to a mutual fund or exchange-traded fund (commonly called an ETF) portfolio.
Coverdell Education Savings Account
Also known as Coverdell ESAs, these programs operate similarly to a trust or custodial account from which payments can be made for a beneficiary’s qualifying educational expenses. Account owners can add up to $2,000 per year to the ESA, though none of these funds are deductible from taxes.
Beneficiaries must be under the age of 18 or qualify as special needs when the account is established. These accounts earn interest at a rate similar to an IRA or 401k, and beneficiaries can withdraw funds tax-free as long as they go toward approved education expenses such as tuition, fees, supplies, books, and equipment.
Early Distribution of IRAs
Given the ever-rising costs of higher education, some individuals, parents, and grandparents decide to make an early withdrawal from their IRA retirement account to help cover expenses. Standard early withdrawals incur a 10% penalty when taken out before the beneficiary is 59 1/2 years of age or older, but qualifying withdrawals can bypass this requirement.
Educational expenses qualify for unpenalized withdrawals, but individuals should know that they will still need to pay income tax on any money taken out. If you have a 401k, you can move funds from that account into an IRA and use it for educational expenses.
Education Savings Bond Program
The Education Savings Bond Program (ESBP) supports older students who want to redeem eligible savings bonds and avoid paying taxes on earned interest. Individuals aged 24 or older when they purchase the bond can redeem both the principal and interest and use it for qualifying tuition and related educational fees. If all of the money goes toward these expenses, they do not have to pay interest.
ESBP funds can be used by the bondholder, their spouse, or a dependent. You can roll the redeemed earnings into a Coverdell ESA, which also allows holders to bypass tax payments on earned interest.
Employer-Assisted Tuition
Also known as employer tuition reimbursement, this option allows employers to provide up to $5,250 per year in tuition assistance that the employee can exclude from their income and therefore not pay taxes on it. To qualify for employer-assisted tuition, individuals must use any funds for approved education fees. These currently include tuition and fees, textbooks, supplies, and equipment.
This program is only available to employees and does not include their spouses or dependents. Many companies advertise employment-assisted tuition as a benefit; if your company doesn’t offer this benefit, ask if they would consider offering it if you work toward a degree that directly benefits the organization.
Unlike the American Opportunity Tax Credit, which offers a maximum of four years’ worth of tax credits, the Lifetime Learning Credit (LLC) does not set a limit on how many years qualified students can take advantage of the discount. Applicants must enroll at an approved educational institution and take courses that lead to a degree, credential, or demonstrably improved job skills.
Scholarships, Grants, & Fellowships
One of the most popular ways of lowering the cost of college while still in school is to take advantage of scholarships, grants, and fellowships. The former two support students at every academic level, while fellowships are typically reserved for graduate students.
You can find scholarships from myriad sources. Colleges and universities commonly provide awards based on both merit and need, as do state governments, nonprofit organizations, government agencies, and for-profit companies. The U.S. Department of Education also provides several grants for qualifying students. These options will likely remain popular since they don’t require you to repay any of the funds as long as you meet the terms of the award.
Student Loan Cancellation & Repayment Assistance
The U.S. Department of Education offers several cancellation and repayment assistance programs for student loans. Some of these are based on income levels, while others reward students for going into specific industries or job types.
The Public Service Loan Program, for instance, allows those working in eligible public service roles to have the remainder of their federal student loans forgiven after making 120 qualifying payments over 10 years. Other options include student loan forgiveness programs for teachers, nurses, or those in the military. Learn more about these programs via the Federal Student Aid website.
