Do Student Loans Count As Income?

Student loans can be an essential source of funding to pay for a college education. But many borrowers aren’t sure how those loans affect their taxes. Do they count as income? Can you deduct the interest you pay? And what happens if your loans are forgiven?

This guide breaks down how federal and private student loans are treated for tax purposes — including when loans might become taxable, how forgiveness is handled, and what deductions you may be eligible for.

Current private student loan rates

Do student loans count as income for taxes?

Whether your student loans are federal or private, they do not count as income on your federal income tax return. That’s because you’re entering into a legal contract when you sign your student loan promissory note, where you agree to repay the amount you borrow. Since your student loans are a form of debt you must repay, this kind of financial aid isn’t included as part of your taxable income. 

See Also: How To Apply for Student Loans in 2025: Federal & Private

Taxes on grants and scholarships

Grants and scholarships are also typically tax-free money for educational expenses, even though you do not have to pay back this kind of financial aid. However, there are some important exceptions. 

The IRS says that money from scholarships and grants that pays for your tuition, fees, and books is tax-free. But if you use scholarship and grant money for room and board or other incidental educational expenses, the IRS requires you to include it as part of your taxable income.

When can student loans become taxable income?

While student loans are typically not included as part of your taxable income, they do become taxable income in some situations. 

“If a student loan is forgiven, the amount forgiven is sometimes considered to be income to the borrower,” says Mark Kantrowitz, a student loan expert and author of books about paying for college. “That’s because loan forgiveness is treated as though someone gave the borrower the money to pay off the loan.”

But this is not necessarily true in all cases. Forgiveness based on the borrower's occupation, or student loans that are discharged when a borrower dies or becomes permanently disabled, is excluded from income, Kantrowitz explains.

So if you receive either Public Service Loan Forgiveness (PSLF) or a loan discharge because of death or disability, you do not have to worry about the forgiven balance being treated as taxable income.

However, any time-based loan forgiveness, such as the cancellation of the remaining debt in an income-driven repayment plan after 20, 25, or 30 years, will be considered taxable income starting in 2026, Kantrowitz says. Borrowers whose IDR loans are forgiven as of Jan. 1, 2026, or later will see their forgiven loans treated as taxable income.

See Also: A Complete List of Student Loan Forgiveness Programs in 2025

Do student loans count as income for FAFSA or other benefits?

Each year you attend college, you must submit the Free Application for Federal Student Aid (FAFSA) to apply for federal financial aid. This application asks you about you and your family’s assets and income to determine your eligibility for grants, scholarships, work-study, and federal student loans.

Since you fill out the FAFSA each year, you might worry that the student loans you received the previous year may count as income on next year’s FAFSA. But Kantrowitz is clear that “student loans do not count as income on the FAFSA or other government benefits.”

The student loans you have taken are not included in your FAFSA assets and income information and will not affect your eligibility for financial aid or the calculations for your award.

Read More: 6 Big Advantages of Federal Student Loans in 2025

What about student loan refunds or excess funds?

Sometimes, your student loan award exceeds the tuition and fees you owe. Loans are disbursed directly to your college, which means the money left over may be “refunded” to you rather than sent back to the lender. Borrowers typically use these excess funds to pay for living expenses and other education-related expenses, since you’re not allowed to use this money for unrelated costs.

If you receive such a student loan refund, it does not count as taxable income. Just like the portion of your student loan that went toward paying your tuition and fees, this part of your loan is also not considered taxable income. 

However, accepting and using the excess funds will increase the total amount of money you borrow. If you don’t need the refund to pay for living expenses, it may make more sense to refuse it and ask your college to send the excess amount back to the lender.

Check Out: Student Loan Refunds: What Borrowers Need To Know

How to report student loan activity on your taxes

Although your loan disbursement isn’t considered taxable income, the interest you pay on your student loans can affect your taxes.

“If you meet the eligibility requirements, you may be able to deduct as much as $2,500 in interest paid on federal and private student loans through the student loan interest deduction,” Kantrowitz explains.

Borrowers are eligible if they’re single and earn less than $100,000 a year or married filing jointly and with an annual income less than $200,000. If you paid at least $600 in student loan interest for the tax year, your loan servicer will send you a Form 1098-E during tax season. You can use the information provided in that form to claim the student loan interest deduction when you file your taxes.

But deducting your interest payment isn’t the only student loan activity you might want to report on your taxes. Kantrowitz also points out that borrowers in an employer-paid student loan repayment assistance program (also known as an LRAP) may need to claim it on their tax return. These programs allow workplaces to help employees pay their student loans as an employment perk. 

“If you’re receiving employer-paid student loan repayment assistance, any amount above $5,250 may be considered taxable income,” Kantrowitz says.

Similarly, if your forgiven student loan is considered taxable income, Kantrowitz reminds borrowers to include that income on their tax return — although your lender will send you a reminder.

“You’ll receive a form 1099-C, a cancellation of debt form, from your lender,” he says. “You have to report this on your federal income tax return like any other 1099 form you receive.”