Like the vast majority of college students, the student loan process is probably your first introduction to the complex world of borrowing, lending, taxation, and repayment. When you first look at the numbers you’ll eventually be responsible for paying back, you might feel a bit overwhelmed. College tuition is expensive, the costs are only rising, and the figure in front of you probably looks like an imaginary number, an amount of money you can’t even imagine possessing. Just breathe, remember that it’s okay to ask questions, and take everything one step at a time, and everything will become much more clear.
One of the first questions you’ll have will probably have something to do with taxes. Yes, taxes; the bane of every adult’s existence. They’re finally creeping into your life, and it’s time to confront them head-on. If your question is, “Do I have to pay taxes on this?,” the answer is…sort of. Depending on the provisions of your loan, it might be susceptible to taxation, but the majority of loans aren’t counted for your income tax.
If you’re receiving a FAFSA loan, i.e. money from the federal government, you’ll have to declare some of this on your tax return form. You don’t have to include money from Pell grants or Stafford loans as part of what is known as your “taxable income.” You must, however, include any money you make from work study programs or similar wage-based reward programs. No one ever said this wasn’t complicated.
As for private awards, according to the IRS’s expansive and coherent tax code, found online at IRS.gov, a private scholarship is not taxable if you are: A. pursuing a college degree (which you are), B. using it for the proper resources, such as tuition and books (which you should be), and C. you’re not receiving the money in exchange for services (which you won’t be, unless you’re engaged in a work study program).
When it comes to repayment, things get a bit more complicated, but trust the process. FAFSA makes tax credit programs available to make the payments a bit easier, such as the American Opportunity Credit, which allows you to deduct $2,500 for every year of loans. This same number ($2,500) is the maximum deduction allowed for any student loan. In most cases, you cannot claim the loan itself on your taxes, but you’ll be able to claim the money paid as interest. For more information on the complex taxation process regarding student loans, the IRS and FAFSA provide comprehensive instructions online for students to pore through.
Student loans are not fun, and they are not easy. It can be difficult to figure out what, exactly, you owe to the IRS, and what you’re being taxed on compared to what you don’t have to declare. Take the process slowly and double-check all your work against the agreements you’ve signed. After all, this is your money and your education, and it’s your responsibility to make sure you take care of business.
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