Personal Finance Essentials
Tax Benefits for Education
The Government Will Help Pay for College
If You Know Which Tax Benefits to Claim
Education Tax Credits
Several tax credits are available to help offset the cost of college. The Hope Scholarship Tax Credit provides a credit of up to $1,500 per student for each of the first two years of college. You must spend at least $2,000 per year in qualifying expenses – note that meals and lodging do not count toward this threshold. The credit phases out for higher income filers. The American Opportunity Tax Credit and the Lifetime Learning Tax Credit offer additional relief for qualifying students and families.
An important restriction: you generally cannot use both a Coverdell Education Savings Account and education tax credits for the same student in the same tax year. Congress created both of these benefits and then made them largely mutually exclusive – meaning parents who use one may be barred from using the other. Understanding which benefit is more valuable in your specific situation is essential before committing to a savings strategy.
The Student Loan Interest Deduction
Families carrying student loan debt can deduct a portion of the interest they pay, even if they do not itemize deductions on their tax return. This deduction is available for loans used to pay qualifying educational expenses for the taxpayer, their spouse or a dependent. Income phase-outs apply, and the specific limits are subject to change. While this deduction does not make student debt a desirable outcome, it does reduce the after-tax cost of loans that are unavoidable. Verify current limits and phase-out thresholds with a qualified tax advisor.
