How are student loans related to tax returns?

I'm trying to understand a bit more about student loans as I prepare for college. I've read something about taxes getting involved with student loans, and I'm curious how that works. Can unpaid student loans affect your taxes, like maybe even taking part of your refund? If anyone has experience or advice on how this all connects, it would be super helpful.

Student loans and your tax returns are indeed connected in a few ways.

Firstly, if you have paid interest on your student loans during the tax year, you may be eligible to deduct up to $2,500 of that interest on your federal income tax return. This is known as the Student Loan Interest Deduction, and it can reduce your taxable income and possibly lower your tax bill.

Secondly, if you default on your federal student loans – which means you fail to make payments for 270 days – your tax refund can be taken by the IRS to repay your student loan debt. This process, known as a tax refund offset, can result in all or part of your tax refund being taken. In this situation, the IRS sends you a notice informing you of the offset and you have the right to challenge it or arrange a repayment schedule.

Lastly, if your student loans are forgiven, which means you don't have to pay them anymore, the amount forgiven is usually considered taxable income and you would have to pay taxes on that amount. However, the American Rescue Plan Act of 2021 has made student loan forgiveness tax-free through December 31, 2025.

This said, each person’s case can be a bit different, so it’s usually a good idea to consult with a tax professional or financial aid counselor to make sure you’re aware of your specific situation.