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Tax Benefits for Education

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What benefits are available? Several tax benefits are available to help families meet the cost of postsecondary education. This is an overview of a few tax benefits. For additional information, including deductions not covered here, please refer to IRS Publication 790 for more details.

Credit or Deduction: There are two types of tax benefits available with respect to higher education costs: credits and deductions.

  • A deduction reduces the amount of income on which your tax liability is calculated.
  • A credit is a dollar-for dollar reduction in the tax due, essentially a tax payment from the government.

A nonrefundable credit reduces the amount of tax you pay but is limited to the amount of your tax liability. A refundable credit is unlimited and may be in excess of your tax liability: a payment to you.

The credits, outlined on the following page, relate to payments made in the current year for higher education expenses. If you are currently repaying an existing qualifying student loan, you may be eligible for the student loan interest deduction.

Two tax credits highlighted on this page:

  • The American Opportunity Credit
  • The Lifetime Learning Credit

STUDENT LOAN INTEREST DEDUCTION

What is the student loan interest deduction?

A deduction for interest you paid during the tax year on a qualified student loan.

Who can claim the deduction?

Generally, you can claim the deduction if your filing status is any filing status except married filing separately and no one else is claiming you as a dependent on a tax return.

What is a qualified student loan?

A loan incurred for the sole purpose of paying qualified education expenses for you, your spouse or your dependent. Loans from a relative or a qualified employer plan are not qualified student loans.

What are qualified education expenses?

The definition of qualified education expenses differs with respect to the various deductions and credits available. As it relates to the student loan interest deduction, qualified education expenses include tuition, fees, room and board, books, supplies, equipment and other necessary expenses, whether paid to the institution or purchased elsewhere.

Who is an eligible student?

The definition of eligible student differs with respect to the various deductions and credits available. A student who was enrolled at least half time in a program leading to a degree, certificate, or other recognized credential is an eligible student for purposes of the student loan interest deduction.

How much interest can you deduct?

This varies according to your adjusted gross income. Please consult IRS Publication 970 for details on how much interest you can deduct.

What can you deduct as interest?

  • Simple interest on a qualified student loan
  • Loan origination fees (other than fees for services)
  • Capitalized interest
  • Interest on revolving lines of credit, such as credit cards, used solely for payment of higher education expenses
  • Interest on refinanced student loans are considered to be student loan interest; this includes interest on consolidated or collapsed loans
  • Voluntary interest payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment
American Opportunity Credit Lifetime Learning Credit
Postsecondary Number of Years Four years of postsecondary education All years of postsecondary education and courses to acquire or improve job skills
Type of Degree Undergraduate degree at a qualified educational institution or other recognized education credential Student does not need to be pursuing a degree or any other recognized education credential
Courses Eligible Student must be enrolled at least half time for at least one academic period during the tax year One or more courses
Felony Drug Conviction None on the student‘s record Felony drug convictions are permitted
Qualified Expenses Course materials, tuition/fees, books, supplies and equipment which may be purchased from the institution or elsewhere Tuition/fees, books, supplies and equipment which must be paid to the institution as a condition of the student‘s enrollment or attendance

Please note that the information contained in this material is from IRS Publication 790. PNC does not provide tax advice and makes no representation or warranty as to the accuracy of the information. Please consult your tax advisor for tax advice on the matters contained here.

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