If you currently attend college, chances are good that you have a substantial amount of student debt. Most college students use a combination of public and private loans to cover their ever-rising tuition costs. According to a recent national study, the typical American college student graduates with more than $20,000 in debt. Students who attend expensive private institutions may graduate with debt loads many times larger than this base amount. If these trends continue, regular middle-class families might soon be unable to send their kids to elite institutions.
Most of your student loans are backed by federal laws that regulate the student lending industry. There are two basic types of student loans: subsidized and unsubsidized. Subsidized loans are available for any students who demonstrate an acute financial need for tuition assistance. By contrast, unsubsidized loans are available to anyone who wants to reduce their direct out-of-pocket education costs. The former type of loan typically comes with lower interest rates and a less aggressive payment schedule. The latter type generally comes with higher interest rates and may require strict adherence to an accelerated repayment plan.
Student loans also have unique tax implications. The means by which your loan is dispensed will determine the manner in which it is taxed. These days, most student loans are structured so as to limit borrowers' tax liabilities and increase their spending power in the increasingly expensive education market.
Some student loans are directly deposited into their borrowers' accounts. While this is more common with privately-issued unsubsidized loans, it sometimes occurs with subsidized loans as well. If you receive a student loan payment in cash, you'll typically be told how to handle the funds. You may be given certain spending restrictions: For instance, you may be prohibited from using your loan funds to finance any purchases that aren't related to school supplies or books. If you violate these terms, you could forfeit future student loan payments and jeopardize a key piece of the financing for your education.
If you receive a student loan payment without these strings attached, the IRS may choose to treat it as taxable income. If this is the case, you'll need to report it using the form that your educational institution will send to you at the end of the tax year. Student loan income that's paid directly to your institution generally can't be categorized as taxable income. Before you claim any student loan payments as regular income, talk with a certified tax professional.