Student Loans & Taxes: Key Strategies to Keep More Money in Your Pocket

As tax season approaches, many student loan borrowers may not realize how their tax filing choices can impact their repayment options. Whether you’re on an Income-Driven Repayment (IDR) plan or considering student loan forgiveness, the way you file your taxes can significantly affect your monthly payments and long-term strategy.

Key Considerations for Tax Season

• Married? Filing Separately vs. Jointly

  If you're on an IDR plan like SAVE, PAYE, or IBR, your Adjusted Gross Income (AGI) is used to determine your monthly payment. Filing separately may exclude your spouse’s income from this calculation, potentially lowering your payment. However, it may also mean losing certain tax benefits, like the Student Loan Interest Deduction, so it's crucial to weigh the pros and cons.

  
  

• Taxable Loan Forgiveness

  While Public Service Loan Forgiveness (PSLF) remains tax-free, forgiveness from IDR plans after 20-25 years could be treated as taxable income. The good news? Until at least 2025, loan forgiveness is not considered taxable under the American Rescue Plan. Understanding how this impacts your long-term financial planning is essential.

  
  

• Student Loan Interest Deduction

  If you’ve made payments on your student loans, you may qualify for a deduction of up to $2,500 on interest paid during the year. This can reduce your taxable income, even if you don’t itemize deductions.

  
  

• Defaulted Loans

  Borrowers who have defaulted loans should know that tax refunds could still be at risk of garnishment if they haven’t taken action. Filing early and ensuring you're enrolled in an appropriate repayment plan can help protect your refund.

What Should You Do Next?

• Review your income and repayment plan before filing your taxes.

• Talk to a tax professional if you’re married and unsure whether to file jointly or separately.

• Check your loan status to avoid any tax refund surprises.

• Update your income documentation if you're recertifying for an IDR plan.

SDS is here to help! If you need guidance on your student loan repayment strategy this tax season, log into your account and explore your options today.