Do Student Loans Count as Income? What Borrowers Need to Know

When filing your income taxes, the first step is to determine what your total income was for the year. The Internal Revenue Service considers everything from money you earned from a job to unemployment benefits, gambling winnings, royalties, court awards, things you sell online, and more as taxable income.

But what about student loans?

Do student loans count as income for taxes?

Student loans, whether federal or private, do not count as income on your federal income tax return. When you sign your student loan promissory note, you enter into a legal contract agreeing to repay the amount you borrow. As a form of debt you must repay, your taxable income doesn't include student loans. But there are other ways student loans may affect your tax filings.

“Student loan disbursements do not impact your income tax,” says Paul T. Joseph, an attorney, certified public accountant, and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan. “While the disbursement increases your cash flow, it does not increase your income tax because you're legally bound to repay the amount of the loan.”

It's important to note that while most grants and scholarships are also tax-free, there are some exceptions. Per the IRS, scholarships and grants that go toward your tuition, fees, and books are tax-free. On the other hand, if your grants and scholarships are paying for your room and board or other incidental expenses, that portion of the funds is taxable.

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How do student loans affect FAFSA and financial aid calculations?

If you're going to college and want to apply for federal aid, you must submit your Free Application for Federal Student Aid (FAFSA) every year. It asks about asset and income information to determine your eligibility for grants, scholarships, work-study, and federal student loans.

Student loans do not count as income on your FAFSA. When it comes to loan disbursements and taxes, your student loans aren't considered income and won't affect your FAFSA eligibility or financial aid calculations.

Tax implications of student loan interest

While your loan proceeds aren't taxable, your student loans affect tax filings in a different way. Student loan borrowers who meet the eligibility requirements may deduct up to $2,500 of student loan interest payments.

That can be a major bonus, as deducting a portion of your student loan interest can reduce your taxable income. In turn, it can lower your tax liability, or how much you might owe in taxes.

“You can deduct student loan interest for you, your dependent, or your spouse if they are enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential,” says Lisa Greene-Lewis, tax expert for TurboTax. “The student or the parent, but not both, can deduct student loan interest. It is always a good conversation to have ahead of tax time to determine who, the parent or student, should claim the student loan interest.”

To qualify for the student loan interest deduction, your modified adjusted gross income (MAGI) must be within certain limits, depending on your tax filing status. As of 2024, single filers with a MAGI of up to $80,000 or $165,000 for joint filers are eligible for the full deduction.

If your MAGI is above these amounts, but less than $95,000 for single filers or $195,000 for joint filers, you qualify for a reduced amount. Once MAGI is above $95,000 for single taxpayers or $195,000 for joint filings, there is a deduction phase-out. In other words, student loan borrowers above that income threshold aren't eligible for the deduction.

“In many cases, the parent can't qualify because they don't meet the income thresholds. If that's the case, the parent should not claim their student as a dependent if their student is working and the parent cannot claim the student loan interest deduction,” Greene-Lewis says. “The parent should let their student benefit from the deduction.”

Do forgiven student loans count as income?

One of the primary benefits of federal student loans is that some borrowers may qualify for student loan forgiveness. Private loan borrowers can't take advantage of the same benefit.

While getting student loan forgiveness can remove the burden of debt and monthly payments, there are some things to consider with forgiven student loans and income reporting. Having a portion of your loan balance wiped out may have tax consequences. But it depends on the forgiveness program and existing tax laws.

Student loan forgiveness under the Public Service Loan Forgiveness (PSLF) program is not taxable. In other words, any balance you have forgiven won't count as taxable income for student loans.

Since this program has an employment requirement that includes 10 years of public service, think of it as the final “thank you” for your contribution. However, be aware this only pertains to federal taxes. The forgiveness amount could be considerable taxable income in some states.

Student loan forgiveness through income-driven repayment (IDR) is tax-free currently, thanks to the American Rescue Plan Act. But the clock is ticking. This provision is available until the end of 2025. Similar to PSLF, some states may consider the forgiven amount taxable. How the IRS and federal government treat forgiven student loans and income reporting in 2026 is still a question mark.