Loan Interest and Your Taxes:
Currently, interest paid on student loans is deductible from your taxes up to $2,500 per year. However, this law is in a state of flux and may change in the years to come. The nice thing about the student loan interest deduction is that you do not have to itemize your taxes to qualify. This is good news for all you 1040EZ filers. If you think you qualify for the student loan interest deductions talk to your lender/student loan servicer and acquire a copy of your 1098-E Tax Statement.
Loan Forgiveness and Your Taxes:
Those of you who are enrolled or plan on enrolling in the IBR or PAYE (click here for a description of these payment plans), need to be aware of the tax implications of debt forgiveness. If you qualify for Public Service Loan Forgiveness (as explained here), your debt is forgiven and there are no tax implications. However, if you make the 20 or 25 years worth of payments (depending upon whether you are in IBR or PAYE), the debt that forgiven is taxable. That means that if you had $15,000 worth of debt forgiven after 20 years, the IRS will tax that $15,000 as if it was additional income. If you don’t plan ahead and you have a lot of debt forgiven, you could be end up with a very large and unexpected tax bill.
-> Sherpa Tip: Having debt forgiven is definitely a good thing, but if you are getting close to your loans being forgiven be sure to consult a tax expert for ways to minimize a painful tax day. One strategy would be to have you employer withhold additional funds each paycheck.