14 Education Tax Credits and Deductions to Know
From the $20,000 529 plan expansion to the return of the student loan "tax bomb," here's how you'll pay for school in 2026 and where to save.
Paying for education expenses is no joke. Recent data show that educators spend from $500 to $900 of their own money on school supplies, while families spend nearly $4,000 annually on K-12 education expenses (never mind higher education costs).
Yet, the 2025 Trump tax bill changed the state of play for many students and families who claim key tax breaks to offset these educational costs.
For instance, for tax returns typically filed in early 2027, new rules governing 529 plans allow $20,000 to be paid for K-12 expenses, up from $10,000. Educators can reduce taxes by up to $350 annually with the educator expense tax deduction.
However, college and higher-education students face changing tax requirements this year, particularly surrounding student loans.
If you're an educator, a current student, a recent graduate paying off student loans, or a loved one saving for a child's education, here's what you need to know about federal education tax credits and deductions.
1. American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is an education tax credit available to people who are currently enrolled in college courses. The credit is partially refundable, meaning it's possible to receive part of the total credit as a tax refund.
- Eligible taxpayers (student, parent or spouse) can claim the credit for 100% of the first $2,000 spent on qualified education expenses (such as tuition, fees and textbooks).
- Eligible taxpayers can claim 25% of the next $2,000.
- The total credit is worth up to $2,500 for each qualifying student.
- If the credit amount exceeds the tax you owe for the year, you'll get a refund of 40% of the remaining amount, up to $1,000, for each qualifying student.
You can only claim qualified expenses for the AOTC. These include tuition and certain related expenses required for enrollment or attendance at the student's college (for example, necessary fees, books, supplies, and equipment).
What expenses do not qualify? Amounts paid for insurance, medical expenses (including student health fees), room and board, transportation, and living or family expenses do not qualify.
AOTC changes for tax year 2026: Under the 2025 Trump tax law, you can claim the American Opportunity Tax Credit provided that the qualifying individual has a valid Social Security number for work. This rule is effective for tax year 2026 (returns typically filed in early 2027).
For more information, see: The American Opportunity Tax Credit (AOTC): How Much Is It Worth?
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2. Lifetime Learning Credit
Another tax credit for people currently enrolled in college is the Lifetime Learning Credit (LLC). This credit is worth up to $2,000 per tax return.
Unlike the AOTC, eligible graduate students can claim the credit. Students don't need to attend at least half-time to claim the credit, either.
- This education credit can be claimed for an unlimited number of years. However, the Lifetime Learning Credit is not refundable.
- It can lower your tax bill to zero, but you won't receive any portion of the credit as a tax refund.
- Income guidelines for the Lifetime Learning Credit are currently the same as those for the AOTC.
Note: Just as with the AOTC, the IRS says you can't claim expenses you use to calculate the Lifetime Learning Credit anywhere else on your tax return.
Changes to the Lifetime Learning Credit for tax year 2026: Trump’s new tax legislation requires qualifying individuals to have a valid Social Security number for work to claim this credit, effective for tax year 2026 (for returns typically filed in early 2027).
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3. New tax credit for private school: Contributions to scholarship funds
If you contribute to certain scholarship-granting organizations (SGOs), you might be eligible to claim a tax credit. This new federal tax credit was included in Trump’s reconciliation megabill.
Advocates of the measure also coined the credit as the "first school choice legislation" passed at the national level, as it’s essentially a tax credit in exchange for donations made to private K-12 schools.
- The maximum credit amount is $1,700 per year.
- This is a dollar-for-dollar tax credit, which can reduce your tax liability.
- The new tax credit is effective for tax year 2027 and is permanent.
Related: 'Unprecedented' Private School Voucher Tax Credit in Trump's Megabill
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4. Tax breaks for scholarships and other assistance
A scholarship, fellowship or grant might be excluded from taxable income if you're pursuing a degree at an eligible educational institution. Education assistance is only tax-free if the funds are used to pay for qualified education expenses.
What are "qualified education expenses?"
- Tuition or fees that are required for enrollment or attendance.
- Books, supplies, equipment or other expenses that are required by the learning institution for a class.
To be considered tax-free, scholarships can't exceed your education expenses or be used to pay for expenses such as room and board or travel.
What about VA education benefits? Payments to veterans for education under any law administered by the Department of Veterans Affairs are tax-free. However, if you qualify for other education tax benefits in addition to military benefits, you might have to reduce the amount of education expenses that you claim.
Qualified tuition reduction: If your tuition is reduced because you or a relative works for a college, you might not have to pay tax on the discount.
For graduate courses, only students who perform teaching or research activities for the educational institution can receive tax-free tuition reductions.
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5. Tax deduction for student loan interest
In some cases, you can take an education tax deduction for the interest you paid on your student loans. You can claim this deduction as an adjustment to your income, so you don’t need to itemize. (Most people take the standard deduction.)
You can only deduct up to $2,500 of student loan interest paid each year. However, how much you can deduct depends on your modified AGI.
To deduct student loan interest, you must have taken out the loan solely to pay qualified education expenses for you, your spouse or a person who was your dependent at the time you took out the loan.
Married couples filing separate returns can't claim the student loan interest deduction. You're also disqualified if someone else (such as a parent or guardian) claims you as a dependent on their tax return.
If you paid $600 or more in interest on a qualified student loan during the taxable year, you should receive a Form 1098-E, Student Loan Interest Statement.
Related: How to Claim the Student Loan Interest Tax Deduction
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6. 529 plan tax benefits
A 529 plan is a tax-advantaged savings account operated by a state or educational institution that can be used to help you pay educational expenses such as college, post-secondary training, school tuition, or student loans. They can even be used to pay for K-12 education for a child or grandchild.
The rules for 529 savings plans don't always limit qualifying education expenses to college tuition or books. Parents and guardians might be able to use the savings to pay for other types of education.
And for tax year 2026, Trump’s new tax cuts and spending legislation expanded the 529 plan.
- Up to $20,000 to pay for K-12 expenses, up from the previous $10,000.
- Includes non-tuition qualified expenses for K-12 costs, including tutoring fees, books, and online materials.
- Includes post-secondary education costs such as tuition, fees, supplies, and testing fees, to name a few.
Overall, rules and benefits for 529 plans vary by state and are based on the 529 savings plan you choose, so it's always important to do your research to see which plan best aligns with your family’s needs.
Related: The 529 Grandparent Loophole for College Savings
Learn more about Trump's changes to this tax break: 529 Plans: Everything You Need to Know
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7. Education tax break: Coverdell Education Savings Accounts (ESAs)
Another way to save for college is through a Coverdell Education Savings Account (ESA). As with 529 plans, money deposited in a Coverdell ESA grows tax-free, and there's no tax on distributions used for qualified college expenses.
Additionally, you can choose your own investments with a Coverdell savings account. However, unlike 529 plans, the tax code places limits on who can contribute to a Coverdell ESA.
- Single people can contribute to a Coverdell ESA only if they have a modified adjusted gross income (MAGI) of $110,000 or less.
- Married couples filing a joint return can't have a modified AGI of more than $220,000.
(Modified AGI is equal to your federal AGI, plus any foreign earned income exclusion and/or housing exclusion, foreign housing deduction, and excluded income from Puerto Rico or American Samoa.)
There are other limits for Coverdell Education Savings Accounts.
- The maximum contribution limit for tax year 2026 is $2,000 per child.
- You can only contribute to a Coverdell ESA until your child is 18 (unless your child has special needs).
- Amounts remaining in a Coverdell ESA must be distributed within 30 days after the beneficiary's 30th birthday (unless the beneficiary has special needs).
Related: Coverdell ESAs vs 529 Plans: Which Should You Choose?
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8. Employer-provided educational assistance
While not an education tax credit, employer-provided education assistance can sometimes result in a tax break. Workers who receive educational assistance benefits from their employer can exclude up to $5,250 of those benefits from their taxable income each year.
Employee educational assistance benefits must be paid under a written educational assistance program.
However, payments for the following items are not considered tax-exempt as part of employee education assistance.
- Meals, lodging or transportation.
- Tools or supplies (other than textbooks) that you can keep.
- Courses involving sports, games or hobbies (unless they have a reasonable relationship to the employer's business or are required as part of a degree program).
Changes related to employer contributions to student loans for tax year 2026: Trump’s new tax law made employer contributions to help pay for student loans permanent. Employers can provide up to $5,250 in assistance to the repayment principal and interest on an employee’s student loans, subject to an annual inflation adjustment (beginning in tax year 2027).
Related: A Little-Known Tax-Free Way to Help Pay Your Student Loan
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9. Education tax deduction for the self-employed
There are a number of self-employment tax deductions. For example, self-employed people generally can deduct the cost of work-related education as a business expense. This reduces the amount of income subject to both the federal income tax and self-employment tax.
To qualify as a business deduction, studies must meet one of the following conditions:
- They are required to keep your present salary, status, or job.
- They are taken to maintain or improve skills needed in your present work.
Even if your studies meet the above qualifications, the IRS says you won't be able to claim education expenses as business deductions if any of the following apply:
- The studies are needed to meet the minimum qualifications of your trade or business.
- The studies are part of a program that would qualify you for a new trade.
What expenses aren't deductible? You can't deduct the dollar value of vacation time or annual leave taken to attend classes.
If you used funds from a tax-free scholarship, grant, or employer-provided educational assistance to cover the cost of education expenses, you cannot deduct those costs as a business expense.
You also can't deduct education expenses if you used the expenses to calculate another credit (such as the AOTC or Lifetime Learning Credit).
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10. Early IRA distributions
Individual retirement accounts (IRAs) are meant to be used in retirement. You generally must pay a 10% tax if you take money out of an IRA before you reach age 59½.
However, it's possible to withdraw funds from a traditional IRA (not a 401(k), 403(b), etc.) to pay for qualified higher education expenses without having to pay the 10% tax penalty.
For the 10% penalty tax to be waived, early distributions should be taken in the same year that expenses are paid. Because college academic semesters often span two separate calendar years, you should carefully time your withdrawals to match the exact year the payment is processed by the school.
Additionally, education expenses must be for one of the following people:
- Yourself.
- Your spouse.
- Your or your spouse's child, foster child or adopted child.
- Your or your spouse's grandchild.
Many types of education expenses qualify to avoid the 10% penalty. According to the IRS, you can use early distributions to pay for the following qualified education expenses:
- Tuition and fees.
- Books, supplies, and equipment for enrollment or attendance.
- Room and board for students attending at least half-time, provided these costs do not exceed the institution's official financial aid "cost of attendance" allowance.
- For students with special needs, expenses for any special services incurred in connection with the student's enrollment or attendance also qualify.
Distributions that exceed the dollar amount of qualified education expenses are subject to the 10% penalty. When calculating this dollar amount, you must subtract any tax-free aid received, such as scholarships, Pell Grants, or veterans' assistance.
Note: You'll still need to pay income tax on the amount withdrawn from a traditional IRA, even if the distributions are used to pay qualified education expenses. For Roth IRAs, income tax applies only to withdrawals of account earnings, not to your original contributions. Plus, even though the 10% early withdrawal penalty is waived, the earnings portion withdrawn from a Roth IRA may still be subject to ordinary income tax if the account has been open for less than five years.
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11. Education savings bond program
You might be able to cash in savings bonds without paying tax on the interest earned. To avoid paying tax on interest earnings, you can use the earnings to pay qualified education expenses for yourself, your spouse, or a dependent.
- The savings bonds must be series EE bonds issued after 1989 or series I bonds.
- The bonds must also be issued either in your name (as the sole owner) or in the name of you and your spouse (as co-owners).
- Additionally, the owner must be at least age 24 before the bond's issue date.
If you want to avoid paying federal income tax on interest from these savings bonds, you must use the earnings to pay for qualified education expenses.
- Qualifying education expenses only include tuition and required fees; expenses for books, equipment, and supplies are not eligible for this exclusion.
- Qualifying expenses must be paid to a school that is eligible to participate in federal student aid programs. The expenses should also be paid in the same year that savings bonds are redeemed.
You also need to have income that does not exceed the income threshold the IRS sets each year. You'll claim your exclusion of interest from Series EE and I savings bonds on Form 8815.
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12. Student loan forgiveness for taxes
While federal student loan payments have resumed, some graduates might have student loans forgiven through other programs. It's good to know whether your forgiven student loan amounts are taxable or tax-free.
If you have had $600 or more of your student loans forgiven, you'll receive an IRS form for the forgiven amount (and any amount forgiven is generally considered taxable income). However, discharged loan amounts resulting from certain student loan forgiveness and repayment assistance programs are tax-free.
You might not need to pay income tax on amounts forgiven through the public service loan forgiveness or other assistance programs that are listed below.
Changes regarding student loan forgiveness for tax year 2026: The American Rescue Plan of 2021, passed during the Biden administration, made student loan forgiveness tax-free through the end of last tax year.
Due to Congress failing to extend this relief, student loan borrowers who had their debts forgiven through income-driven repayment (IDR) plans in 2026 could face significant federal tax bills this year (Note: If your loans qualified for forgiveness and you were approved for 2025, but processing delays or administrative pauses pushed the actual processing later, the IRS may still honor the discharge).
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13. 401(k) student loans match
Thanks to the SECURE 2.0 Act, some with student loans might be able to receive a retirement match from their employer for every student loan payment made.
Those with student debt who work for a participating employer with a 401(k) plan, 403(b) plan, governmental 457(b) plan, or SIMPLE IRA can participate in the retirement match.
To qualify, you must be making "Qualified Student Loan Payments (QSLPs)." You should be prepared to provide your employer with QSLP information, including:
- The amount and date of the loan payment.
- Confirmation that you made the payment (not your friend, for example).
- Confirmation that the loan is a qualified student loan and was used to pay for qualified higher education expenses for yourself, your spouse, or your dependent.
- Confirmation that you incurred the loan.
Note: Keep in mind that employers don't have to participate in the match. They might also require you to opt in, as well. For more information, see IRS Rules for 401(k) Student Loan Match.
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14. Tax deduction for educator expenses
If you’re a teacher, the educator expense tax deduction can help you reduce your taxes. For the 2026 tax year, the deduction is worth $350 ($700 if married, filing jointly, and both spouses are educators, but not more than $350 per person).
Eligible instructors include kindergarten through grade 12 teachers, instructors, counselors, principals, or school aides who worked at least 900 hours per school year.
Starting this filing season, the types of educators and items that qualify to claim this tax break have expanded. Now, coaches and sports-related equipment used in educational settings are included.
Some qualified expenses also include:
- Books, school supplies, or computer equipment.
- Supplementary materials used in the classroom.
- For health or physical education, expenses for supplies must be used for athletic purposes.
For more information see: Educator Expense Tax Deduction: What to Know.
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