Student Loan Debt: How is it treated by the IRS?
By Catalin Clarke, CPA
The Doty Group, P.S.
Student loan debt is treated differently than other types of non-business debt by the IRS in some ways. The biggest difference is that student loan interest may be deductible on page 1 of your individual tax return. There are also alternate qualifications to meet in order to exclude any income from the cancellation of that debt. Below are some potentially overlooked tax issues related to student loans.
Taxpayers with student loans may be able to deduct the interest paid from their income. The quickest way to determine this is by looking at the Form 1098-E which student loan servicers provide to individuals who paid at least $600 of interest in a given year. 1098-Es are due to borrowers by February 1 following the close of the tax year. The deduction is capped at $2,500, even for married taxpayers with multiple loans. Depending on adjusted gross income (AGI) and filing status, the deduction may be limited or “phased out.” AGI can be found on line 8b of the 2019 Form 1040. These limits are periodically adjusted for inflation. The phase-out limitation amounts for tax year 2019 are shown in the table below.
There are several programs that allow for the discharge of student loan debt based on factors such as working in an underserved area, or within public service. Employers may also offer student loan assistance as an employee benefit, which is not the same as loan forgiveness.
When a debt in your name is forgiven it can have a major unintended consequence - cancellation of debt (COD) income. The tax code generally considers the amount of debt canceled as taxable income.
Fortunately, if the below conditions are met, a borrower can exclude this potential blindside from their income.
The loan must meet the statutory definition of a student loan.
The loan was made to help the individual in attending a qualified educational institution.
The discharge was due to a provision of the loan.
Finally, the loan was discharged as a condition of working in a certain profession for a specified amount of time.
All four of the above must be met in order to exclude the student loan discharge from income. However, for 2018 to 2025, many student loans discharged due to the death or total and permanent disability of a student may be written off tax-free for the borrower. It should also be noted this exclusion from income does not apply when the loan is repaid by a third party, such as an employer. It must be discharged by the lender.
As with all things tax, this is not to be considered personalized advice.
If you have further questions or concerns, please contact your tax advisory team at The Doty Group.
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