Tax Credit and Deduction Breaks for College Students

Hear that, guys? College students get tax breaks! Turns out all the blood, sweat and tears come with some perks, after all. Making sure you get all the possible credits and deductions is a lot easier than you might think, and with school starting back soon, easy is in high demand.

Even if you’re not the one paying for all your school expenses (let’s just say my parents are glad I’ve graduated), understanding how to maximize tax savings will be a great help for you and anyone who’s helping to pay for your education.

Simplifying the lingo

Every dollar you save on your taxes as a student is going to come from either a credit or deduction. A credit is an amount of money that directly reduces the taxes you owe, while a deduction is an amount of money that reduces your taxable income for the whole year. While both are pretty sweet, credits usually help you save more, since they reduce the tax you owe dollar for dollar.

Here’s why: Let’s say you're single and earned $9,000 this year. Since you fall into the 10% tax bracket, you’ll owe $900 in taxes. If you get a $500 credit, that money will be taken off the $900, so you’ll only owe $400 in taxes at the end of the day.

But if you get a $500 deduction, that money comes off your taxable income. $9,000 minus the $500 deduction is $8,400, and if you’re taxed at 10%, you’ll pay $840 (not including any other deductions).

So a $500 credit is worth more than a $500 deduction. You won’t always have the option to choose credits over deductions, but when you do, it’s usually better to go with credits.

Credits

The qualifications for getting a tax credit are pretty simple. You have to be enrolled and paying qualifying education expenses to claim a credit. When I say qualifying expenses, I mean tuition, fees, books and supplies, but not transportation or room and board (you can check out all the particulars here). If you’re enrolled but aren’t paying for school from your own wallet (e.g., if you’re on a full-ride scholarship), you won’t qualify for a credit. You also won’t get the credit if your parents still claim you as a dependent on their taxes: your parents will get it instead.

The main credits for college students are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is only available for the first 4 years of higher education, but here’s the good news: the credit can be up to $2,500, and 40% of the credit may be refundable. That means that if the credit pays for everything you owe in taxes and then some, you could also qualify to get the “then some,” up to $1,000, as a refund.

The LLC doesn’t have a limit to the years you can claim it, so it can be applied to undergraduate, graduate, and professional degree courses. An LLC is worth up to $2,000, but is not a refundable credit. You won’t get anything extra after the credit covers your tax liability.

And, of course, you can only choose one if you’re eligible for both, so weigh your options and see what works best for you.

Deductions

A tax deduction minimizes the amount of your income you have to pay taxes on, so what kinds of expenses can you deduct?

One of the easiest deductions to claim is for tuition and fees, which can reduce your tax liability by up to $4,000. Even better, you don’t have to itemize to take advantage of the tuition and fees deduction, since it counts as an adjustment to your income. It’s important to note, though, that you can’t claim this deduction if you’re using one of the credits to pay for tuition and fees.

Maybe you’re a new graduate facing what seems to be a wall of debt to rival China’s wonder of the world. There’s good news for you too. You can deduct student loan interest up to $2,500, including both required and voluntary interest payments (if you decide to pay extra interest and save a headache later, that’s deductible too). Check out our Tax Guide for more information on student loan interest.

Scholarships and fellowships

Here’s another perk: scholarships and fellowships are tax-free if used for qualifying expenses at eligible education institutions. While any money left over from your scholarship after you’ve paid for tuition, fees, supplies, etc. will be taxed, every dime you spend on school is tax-free.

Spend, record, save and repeat

You’ll receive a form from your institution detailing your qualifying expenses (Form 1098-T), but it never hurts to keep your own records to compare. Whether you use the AOTC, LLC, or a tuition and fees deduction, you’ll need to know just how much you spent on school to get the most bang for the bucks you’ve spent—I mean, hey, I like beef Ramen as much as the next person, but graduating to a steak dinner every once in a while doesn’t sound too bad either.

And there you have it! Do a little digging, and you could easily come up with some pretty significant tax breaks. Turns out getting a tax credit or deduction for college expenses isn’t as hard as it sounds.