The tax bill that was signed into law in December 2017 very nearly included a number of provisions that would have been disastrous for both current and former student loan borrowers — like eliminating the student loan interest deduction and tax-free tuition waivers for graduate students. Fortunately, most of the radical changes originally on the chopping block were rejected.
So what do you need to know about how the new tax bill impacts student loans? The quick summary is this: Not a whole lot has changed and there's at least one positive addition — removing tax liability from discharged student loans in the case of death or disability — that will make paying back student loans just a little bit easier.
If you’re a current student with student loans or a former student paying on your student loan debt, you can now breathe a sigh of relief.
But before you go back to “business as usual,” it’s a good idea to know what will stay the same under the new bill and what may have changed if some of the proposed changes had passed.
The good news
For the most part, student loans were spared some pretty drastic cuts. This means that taxes on current students remain largely unchanged.
If you have current student loans or are paying back student loan debt, here’s the good news:
- The student loan interest deduction remains the same. This means that you will still be allowed to claim a deduction of up to $2,500 for the interest you pay on student loans each year. If your modified adjusted gross income is less than $80,000 per year as a single filer, or less than $160,000 as a joint filer, this deduction allows you to save up to $625 per year.
- Tuition waivers for graduate students will remain tax-free. This is good news if you are a graduate student who teaches or does research in exchange for tuition. Some estimates place the value of that waived tuition as high as $50,000 a year. If this bill had passed, you would have seen your tax bill increase by thousands of dollars.
- Federal and private student loan debt discharged because of death or disability will not be taxed from 2018 through 2025. Prior to this bill, the IRS treated the amount of the forgiven loan as taxable. But now, the new tax bill excludes student loan debt forgiveness from taxable income if you are permanently disabled. It also excludes forgiveness in the event of death if there is a cosigner on the loan.
Here’s what could have happened
Even though student loans squeezed through the new bill with very few changes for people with student loan debt, things could have been much different.
The original tax proposal could have been devastating for students and here’s why:
- Both the House and Senate versions of the bill would have eliminated the ability to deduct the interest paid on your student loan. This amounts to a $2,500 deduction each year.
- The loss of tax-free tuition waivers for graduate students. An earlier version of the bill passed by the House in November would have taxed that money as income. So, if you are one of the 145,000 graduate students who receive this waiver, you would have been taxed on money you never actually received. This could have raised your tax bill by 400%.
- If you are receiving tuition assistance from your employer you would have been required to count that as taxable income. This means you would have been taxed at a higher rate. But the new bill leaves this alone and the first $5,250 or employer tuition assistance will remain tax-free.
- The Lifetime Learning Credit (LLC) was also on the initial cut list, but the final bill keeps this in place. If you are a single filer and make less than $67,000 or you’re married (filing jointly) and make less than $134,000 you are eligible for a tax credit of up to $2,000 per taxpayer for education expenses.
Other changes that impact how you save for college
If you have children and put money in a 529 savings account for their college, you will see a change to the rules on how that money can be used.
The final version of the tax bill expands the use of 529 savings accounts to include expenses for private K-12 education.
Before the tax bill passed, a 529 could only be used for college expenses. But now the money from a 529 can be withdrawn tax-free and used for K-12 private school tuition and college expenses.
This change applies to both new and existing 529 accounts. The final bill also allows you to deposit $10,000 per beneficiary, per year into this account.
You may also be interested in How Student Loans Affect Your Credit.