tax breaks for students
Updated March 25, 2020

5 Tax Breaks for Students to Lower Tuition Expenses

Tax Deductions and Credits

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During the 2018-2019 school year, the average college tuition amounts to $35,676 in private colleges and universities.  And as for public colleges, the average tuition for in-state students is $9,716, whereas out-of-state students have to pay $21,629.

Good to Know: There is no denying that getting an education in today’s world is rather challenging, but it’s necessary to get one’s foot in many industries. Knowing your options when it comes to taxes will allow you to significantly reduce college tuition expenses. Even less common is the full-ride scholarship, which is offered by certain colleges to top students and covers all education costs. But the fact is that the number of students who get access to this golden opportunity is less than 20,000 students per year.

This post is for money-conscious students and parents who want to make the most of the options available to them. By the end of it, you will have learned five tax breaks for students that will lower your tuition expenses.

A Few Pointers on Tax Breaks

First of all, let’s go over a few guidelines you should be aware of.

  • You can claim these tax breaks either for yourself – if you are an eligible student, your spouse, or a dependent child.
  • Also, a single student cannot benefit from two tax credits at the same time.

Pro Tip: Note that there was a tax deduction called Tuition and Fees Deduction that was available prior to the 2018 tax year, but it expired and wasn’t renewed. So while you may read about it in other resources that date back to 2018 and prior, it’s currently not available.

What is The Difference Between Tax Credits and Tax Deductions?

If you’re not familiar with these two terms, you might feel confused as you read them while browsing online resources. Tax deductions for students reduce the amount of your taxable income – they apply before calculating how much tax you need to pay. On the other hand, tax credits decrease the amount that you have to pay in taxes and apply after the tax is calculated.

Per Example: In the case of a $1,000 deduction, if you are in the 24% tax bracket, you will be able to deduct $240 from your tax income (1,000 multiplied by 24%). If you get a tax credit of $1,000, and you owe $7,000 in taxes, the amount you will pay will be reduced to $6,000. So while both help you decrease the tax you have to pay, but they work in different ways. Knowing the difference is crucial for you to calculate how much money you can save.

Pro Tip: Keep in mind that some credits are refundable – either partially or totally, meaning if the tax you pay is lower than your credit, the IRS will send you a refund equal to the difference. If you are looking for an easy-to-use tool to calculate and track your taxes, be sure to try Hurdlr.

#1 American Opportunity Tax Credit (AOTC)

According to the IRS, you can claim this tax credit for the first four years of higher education. The expenses on which this tax credit applies include tuition, the fees required for enrollment as well as the books and materials required for education.

Good to Know: Note that expenses like room and board, transportation, insurance, or medical expenses do not qualify for the AOTC. Single filers are eligible if their adjusted gross income (AGI) is less than $80,000, whereas the maximum AGI for couples is $160,000.

Additional Tip: If the student has a felony or drug conviction, he or she will not be eligible for this tuition credit. The amount of the AOTC is 100% of the first $2,000 of eligible expenses, plus 25% of the next $2,000.

Keep in Mind: There is a limit to how much money you can save with this tuition credit: each eligible student has the right to benefit from a credit of up to $2,500. Note that 40% of this credit is refundable and that the refund is capped at $1,000.

Pro Tip: To claim the AOTC, you have to fill the Form 8863 and submit it with the Form 1040. The school, college, or university attended by the eligible student can provide the forms necessary to claim the AOTC.

#2 Lifetime Learning Credit

The Lifetime Learning Credit, or LLC for short, is another tax credit that the American government offers to college students. The education expenses that qualify for this tuition credit include tuition, enrollment fees, and the mandatory books and supplies for classes. Unlike the American Opportunity Tax Credit, there is no restriction to the number of years where you can claim the Lifetime Learning Credit.

Good to Know: Note that to benefit from this tuition credit, you have to be enrolled in a college or university for at least one academic period – which can be a semester, a trimester, or any other period of study. The maximum income allowed for claiming the LLC is $67,000 for single filers and $134,000 for joint filers.

Pro Tip: The other restriction in terms of income is the gradual reduction of the amount of the LLC when the MAGI is between $57,000 and 67,000 for single filers, or between $114,000 and $134,000. Lastly, the LLC is not a refundable credit, so while you can use it to reduce the taxes you owe, you won’t get a refund in case what you owe is lower than the LLC. While the AOTC is generally preferable to the LLC, it also imposes more restrictions, so if you don’t qualify for the AOTC, you can probably still choose the LLC.

#3 The Student Loan Interest Deduction

As its name denotes, the Student Loan Interest Deduction is a tax deduction for students you can claim on the paid interest on a student loan during a tax year. If you are eligible for this deduction, you can claim up to $2,500 for interest paid on student loans. The amount you can claim is equal to the lesser of either $2,500 or the actual paid interest.

Good to Know: Keep in mind that in order to be eligible, the student has to be enrolled at least part-time in a degree program. And like tax credits, the eligible person can be either yourself, your spouse, or your dependent. The MAGI limit to qualify for this deduction is $80,000 for single filers and $165,000 for joint filers. To calculate the amount of the deduction, you can refer to this worksheet provided by the IRS.

Pro Tip: The Student Loan Interest Deduction is another good choice if you’re looking for student tax deductions to achieve lower college tuition expenses. If you have a student loan and are looking for ways to save money, be sure to give Lendkey a try.

It’s a platform for student loan refinancing that connects you to community banks and credit unions and helps you find offers with low-interest rates; click here to get started.

#4 529 Saving Plans

Also referred to as Qualified Tuitions Programs (QTP) by the IRS, 529 saving plans are investment accounts that parents can open for their children’s future education. If you are a parent and you decide to go that route, the earlier you start, the better.

Good to Know: Parents can save money for education in undergraduate or graduate schools as well as technical and trade schools. The money distributed from a 529 saving plan is not taxable unless the amount distributed is higher than the beneficiary’s adjusted qualified education expenses. Furthermore, there is no limit to the amount of money you can deposit in a QTP. Just like the other tax breaks for students, the qualified expenses for 529 saving plans include tuition and fees along with books, supplies, and equipment.

Pro Tip: Qualified expenses include also room and board, expenses for special needs services, and even one computer, computer software, or internet access and related services per student.

Additional Advantage: Another advantage is that anyone can make contributions to the saving account, whether it’s a godparent, grandparent, or anyone else. Also, there are no income limits for the contributors, which is really convenient. However, money that is put in a 529 saving plan but not used for tuition expenses can be subject to taxes and even penalties. 529 saving plans may change depending on the state and the postsecondary institution, so you will have to ask a state agency or an eligible institution for specific information about their saving plans.

Greatest Advantage: If a 529 saving plan sounds like the right fit for you, you can open one quickly and easily CollegeBacker. CollegeBacker provides an intuitive, secure, and transparent saving platform; learn more about it here.

#5 Coverdell Educational Saving Accounts (ESAs)

This is a saving account sponsored by a bank, a credit union, a brokerage house, or other financial institutions. The funds withdrawn from a Coverdell ESA are free from taxes as long as they are used to cover education expenses. These expenses include tuition, books, supplies needed for attendance, special needs services, and room and board if the student is enrolled half-time or full-time.

Good to Know: The beneficiary must be at least 18 (except in the case of a special needs beneficiary) to withdraw funds and cannot do so if he reaches the age of 30. And unlike a 529 saving plan, computer and internet expenses are not included among the qualified education expenses.

Pro Tip: There is also an income limit of $110,000 for single filers and $220,000 for joint filers. Contributions to an ESA can be made by several individuals, provided each one’s income is within the limit above. Also, each beneficiary can receive a total contribution of up to $2,000 in a given year.  The Coverdell Educational Saving Account also allows its holder to invest assets other than college funds, like stocks, in a tax-free manner.

What is the Difference Between a 529 Saving Plan And the Coverdell Educational Saving Account?

At a first glance, these two tax incentives can seem quite similar, so it’s important to know where the difference between them lies.

  • First, a 529 saving plan has no age restrictions, whereas a Coverdell ESA requires that the beneficiary’s age is between 18 and 30 (with the exception of special needs beneficiaries).
  • Second, there is no income restriction on a 529 saving plan, unlike Coverdell ESA – as we saw above. But perhaps the most notable difference is the fact that while a 529 saving plan has no limit for how much money you can deposit in it, the Coverdell ESA has a limit of $2,000 per student per year.

Good to Know: One feature of the Coverdell ESA that a 529 saving plan doesn’t have is that you can invest funds other than college tuition: stocks, bonds, mutual funds, etc. So you if you are interested in investment flexibility and tax-free growth of assets, you may find the Coverdell ESA more enticing.

Pro Tip: There is always the possibility of going for both options, and contributing to both a 529 saving plan and a Coverdell ESA – but it’s not always the best choice. However, this option should be saved for those who have big saving goals and can afford to open both accounts.

In general, many families tend to pick the 529 saving plan over the Coverdell ESA due to the advantages it provides. Whichever one you choose, if you don’t spend the money on college expenses, you may end up facing a federal penalty equal to 10% percent of your earnings (in some states, the percentage goes can reach 20%).

How Do You Determine the Best Tax Break for You?

Parents and students often feel confused when trying to pick a tax break for college. The first thing to take into consideration is that the IRS does not allow the same student to claim two tax credits at once. However, if you are a parent and you have two or more children, you don’t have to pick the same tax break for all of them; instead, you should determine which one suits each of them the most. You can’t claim a tax credit and a tax deduction in the same tax year for the same student, so you should take the time to compare the pros and cons of all your options.

Tip for Undergraduates: If you’re an undergraduate student (your program lasts four years), the American Opportunity Tax Credit may be the better choice since it offers a higher credit amount and is refundable.

For Graduates: For graduate students, the Lifetime Learning Credit might be the better option because there is no limit on the number of years; they can claim it as long as they need to.

Pro Tip: If you are not enrolled part-time and are attending just a few courses, the LLC is the right fit for you. If you don’t qualify for either tax credits, you will have to opt for student tax deductions. That said, you can still benefit from the Student Loan Interest deduction, or open either a 529 saving plan or a Coverdell ESA.

Try to eliminate the options you don’t qualify for, then compare the advantages and restrictions of those you do qualify for, and choose wisely the best fit for your situation.

Tax Breaks for Students: Wrapping It Up

College still remains an essential step for many career paths. Luckily, the US government provides incentives to help citizens reduce tuition expenses. Going to college is expensive, so you’re going to need any means of alleviating its cost. If you are a young adult, saving money by searching and assessing available possibilities is an important aspect of personal finance. And if you are a parent, then you already know how important tax optimization is.

Tax breaks for students are a useful incentive to take advantage, however, it can be confusing to choose the right one among the options available. So, compare the tax breaks for students in this post, and find out which one fits your exact situation; every bit of help you can get matters.

Final Tip: Make sure you are qualified for whichever tax break you have decided to claim before doing so.

Which one of these tax breaks are you planning to claim? Do you know of other useful tax breaks for students? Tell us in a comment below!

Logan Allec, CPA

Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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