Students loans are both a blessing and a curse. We won’t dive into the debate here about the politics or economic policies around student loans, but there are a few things that borrowers should know that don’t come up very often. One of those, writing off student loans, is, unfortunately, poorly understood.
The simple fact is that there are many problems with the way student loans work. One of the biggest is the lack of communication on financial information for those in debt. Most people don’t know what you can and can’t do with student loan debt, especially when they accept these loans as an incoming freshman.
For example, the amount of people that had no clue they could never declare bankruptcy on student loans is almost certainly over 50%. And the number of people who don’t understand how interest impacts the amount of their debt over time is undoubtedly high. Those are both important, but that knowledge doesn’t help you pay your bills.
What can help you, however, is writing off student loan interest, and it’s not talked about enough.
As much as interest rates on student loan debts are stealing more and more money from graduates, they can recover a portion of that money by writing off student loans’ interest rates. Still, too many graduates ignore or don’t know about this benefit.
What to know about writing off student loans’ interest
To be clear, we are not saying you can write off your student loans payments. Only the interest is tax-deductible, but that can mean a lot. Getting your student loan interest payments back in your pocket through tax deductions could mean hundreds of dollars back into your bank account. This tax write-off allows you to deduct up to $2,500 from your taxes in a year.
Many people won’t have student loan debt large enough to have the full $2,500 deduction in interest but, if you do, there is no reason to miss out on claiming every dollar you can.
While writing off student loan interest is the primary way to save money, it is not the only way to save on college expenses with tax exemptions. The most effective way to create a beneficial financial situation will always be to plan ahead of time and educate yourself on saving money. The following tax exemptions are great ways to save money while still attending school.
Writing off student loans: Understand other forms of tax credits for higher education
The American Opportunity Tax Credit (AOTC) reduces college expenses by allowing you to claim up to $2,500 from your income tax. This income tax deduction can reduce the load of tuition, books, supplies, or other fees associated with education. It’s aimed at lightening the financial burden of actually attending school.
Another exemption, the Lifetime Learning Credit (LLC), allows a further $2,000 deduction for supplies and equipment for materials required for a course that needed to be purchased from the school.
While these programs don’t help the person who is already out of school and repaying loans, they help current students, and the Protecting Americans Against Tax Hikes Act of 2015 made the AOTC a permanent tax exemption. To claim tax credits through AOTC or LLC, you must use Form 8863 in preparing your taxes.
Do you know what education tax credits you can tax advantage of? Do the people you care about know these credits exist?