The silver lining of tax filing season: the potential for a decent tax return. And while there are countless ways to spend your return, the best one for you will depend on your unique situation. If you have student loans, you could put a portion of your return toward reducing your debt.
But there are also some tax deductions and credits you might not be aware of that can help ease your burden if you have student loans. And while you may not be eligible for all of them, it doesn’t hurt to know your options.
Tax Deduction Vs. Credit
Before diving in, it’s important to understand the difference between tax deductions versus tax credits. Deductions reduce your taxable income, while tax credits reduce what you owe in taxes. Both can ultimately reduce your tax burden, but they do so in different ways.
4 Ways to Use Your Taxes to Reduce Your Student Loan Burden
1. Claim the American Opportunity Tax Credit (AOTC)
If you’re currently enrolled in school, you might be eligible for the AOTC. This $2,500 credit can cover qualifying educational expenses, such as tuition, textbooks, and equipment and supplies you use for school.
2. Claim the student loan interest deduction
If you’ve already graduated and are repaying your student loans, the government offers a student loan interest deduction that reimburses you for a portion of the interest payments you make – up to $2,500 per year deducted from your taxable income. Let’s say you’re in the 25% tax bracket; in that case, it’s up to $625 back in your pocket every year. Better yet, that’s $625 towards the principal of your student loan debt—more on that in a moment.
As long as you make less than $90,000 per year, you could be eligible for at least some part of this benefit. The amount of savings is completely determined by the amount of interest you paid last year, so be on the lookout for a letter from your lender and be sure to report that amount along with your taxes.
3. Change your withholding
You have some control over the size of your refund at tax time. Talk to your employer and revisit your W-4. Review your last couple of tax refunds, and adjust this year’s W-4 withholdings according to your present financial situation and aspirations. If you seem to spend every dime of your take-home pay, then ask to withhold more each pay period. In doing so, you could end up with a larger refund from your tax return. Withhold less and you take home more money each month, but your tax refund will be smaller or nonexistent.
4. Put your refund toward your student loans
If you opt for a higher withholding and end up with a large tax refund, consider putting all or a portion of your refund toward your student loans. Using a windfall like a big return could help you accelerate your student loan repayment.
How refinancing your student loans can help with your payments
Putting some of your tax refund toward your student loans can be a wise financial move. To reduce your debt burden even further, also consider refinancing for a lower interest rate. ELFI offers low rates, no fees, and flexible terms if you’re seeking to refinance. Customers have reported they’re saving an average of $334 every month and an average of $21,921 in total savings after refinancing their student loans with ELFI.* Try ELFI’s student loan refinancing calculator to estimate how much you can save.
ELFI cannot give tax advice and readers should consult a tax advisor about their specific circumstances.
*Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 10/1/2024 and 12/31/2024. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.
