Student Loan Tax Traps to Avoid in 2026
Student loan policy and some key tax rules have changed in recent years. Here's what you need to know.
For more than 40 million people in the United States, federal student loans are an increasingly difficult financial burden to manage.
The high cost of living is part of the problem, but President Donald Trump's second administration has also introduced major student loan repayment changes, including the new Repayment Assistance Plan.
While attention usually focuses on monthly payments, important student loan tax consequences can be overlooked. Some can work in your favor, like the student loan interest deduction, while others, surrounding tax filing status or employer benefits, can be complex.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If that weren't enough to worry about, 2026 marks the return of federal taxes on some forgiven student loan debt. Here's more to know about that shift and navigating other student loan "tax traps."
Student loan repayment changes
Before we dive into student loan tax issues, it helps to look at how much the student loan landscape has changed in recent years.
New repayment options took effect on July 1, 2026, including the Repayment Assistance Plan (RAP) and Tiered Standard Plan. Other repayment plans have been restricted, and various rules governing which loans qualify for which plans have also changed.
The Trump administration has also pursued changes involving student loan forgiveness while tightening loan limits for some graduate and professional degree programs and adjusting collections processes.
Those shifts all matter, especially with average student loan monthly payments reportedly hovering around $430.
Avoiding student loan tax traps
It's important to note that this is not an all-inclusive list of potential tax issues and concerns surrounding federal student loans. It highlights some key concerns merely for educational purposes.
And because every borrower's situation is different, it's important to consult a tax or financial advisor familiar with your situation to determine the best course of action to potentially reduce your tax liability and student loan payment amounts.
1. Getting hit with the student loan “marriage penalty”
If you’re married with student loans, your tax filing status can affect both your student loan payment calculation and your tax bill. This is especially important this year because of the new federal student loan Repayment Assistance Plan (RAP).
- RAP uses a borrower's income and family information to determine the federal student loan monthly payment.
- For married borrowers, tax filing status can affect whether the calculation includes a spouse's income.
That creates a potentially significant trade-off for some couples.
Consider a married couple with $100,000 of combined adjusted gross income (AGI), split evenly between the two spouses. If only one spouse has federal student loans, filing jointly would put the couple's full $100,000 of income into the RAP calculation.
Under RAP's payment schedule, that could translate to a base payment of roughly $750 a month. If the borrower instead files separately, only the borrower's $50,000 in income would be used, potentially resulting in a base payment of about $167 per month. That's a difference of roughly $583 a month — or nearly $7,000 a year.
But that lower student loan payment comes with a glitch: Filing separately can increase a couple's income tax bill and generally makes them ineligible for the student loan interest deduction and/or other potentially valuable tax deductions or credits.
So the couple would need to compare the potential $7,000 in annual student loan savings with the additional taxes and lost tax benefits of filing separately.
Disclaimer: This is a fictional illustrative calculation, not a prediction of what every borrower of $50,000 or $100,000 will pay. RAP also reduces payments for borrowers with dependents.
Remember:
- Married taxpayers who file separately generally cannot claim the student loan interest deduction.
- Other federal tax credits and deductions can also be limited or unavailable to married couples filing separately.
- That means borrowers shouldn't decide on filing status just by looking only at their student loan payment.
It’s good to consult with a trusted tax professional who can help you select the best filing status for you.
2. Paying taxes on student loan forgiveness
The idea of having the federal government forgive your student loan debt can be exciting. But if you anticipate having your loan debt forgiven in 2026, that relief could come with tax liability.
Why? A little history: During the pandemic, the American Rescue Plan Act (ARPA) temporarily excluded certain student loan debt discharged between 2021 and 2025 from federal taxable income.
- However, that broad temporary exclusion expired at the end of 2025.
- As a result, some borrowers whose student debt is forgiven or discharged this year (2026) could face federal income tax on the canceled amount.
Keep in mind: Whether forgiven student debt is taxable at the federal level depends on when and why the debt was discharged and whether a specific exception or exclusion applies.
- For example, the IRS says certain types of forgiveness and discharge remain excluded from federal taxable income, including Public Service Loan Forgiveness, Teacher Loan Forgiveness, and certain discharges due to death or total and permanent disability.
- Borrowers who are insolvent when debt is canceled may also be able to exclude some or all of the canceled amount under general cancellation-of-debt rules.
But…state taxes can add a wrinkle. States don't necessarily follow the federal tax treatment of forgiven student debt. So whether your state will tax your forgiven student loan amount may depend on the type of forgiveness and whether your state conforms to federal tax law.
If you expect a significant amount of debt to be discharged this year, try to understand the tax treatment before the forgiveness takes place. That might give you time to set aside money, adjust withholding, or make estimated tax payments rather than being surprised when tax season rolls around.
3. Overlooking the student loan interest deduction
Student loans aren't all negative for your taxes. One commonly overlooked benefit is the federal student loan interest deduction.
- Eligible borrowers can deduct up to $2,500 of interest paid on qualified student loans during the year.
- The deduction is available even if you don't itemize deductions, although income limitations and other eligibility requirements apply.
The student loan interest tax deduction can be easy to miss because it doesn't reduce your tax bill dollar-for-dollar. Instead, it reduces the amount of income subject to federal income tax.
Your loan servicer generally reports qualifying interest payments on Form 1098-E, Student Loan Interest Statement. But receiving the form isn't enough to establish eligibility for the tax break. Your income, filing status, and other circumstances come into play.
The student loan deduction can also interact with the filing-status decision some married borrowers face.
- As mentioned, married taxpayers who file separately generally cannot claim the student loan interest deduction.
- If you're a couple considering filing separately to reduce an income-driven student loan payment, you should carefully consider the tax trade-offs.
4. Missing out on tax-free employer student loan assistance
Under federal educational assistance rules, employers can provide up to $5,250 a year in tax-free educational assistance, including qualifying payments toward an employee's student loans.
The 2025 Trump/GOP tax law made this student loan provision permanent.
- But there is an important distinction: This isn't a tax deduction an individual borrower can claim on their own.
- The employer has to offer a qualifying educational assistance program.
It’s also important to note that employer educational assistance and tuition reimbursement are different.
Educational assistance programs can cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Tuition reimbursement programs, on the other hand, typically cover only tuition and related expenses for courses taken while employed.
Check with your employer if you’re unsure about education-related benefits they do or don’t offer.
5. Skipping retirement contributions while paying student loans
Student loan payments can also affect your retirement savings even if your employer doesn't directly help pay the loans.
Under the SECURE 2.0 Act, employers can treat certain qualified student loan payments as elective deferrals for purposes of making matching contributions to a workplace retirement plan.
That means some borrowers can receive an employer retirement match based on their student loan payments even if they're not making equivalent contributions to the retirement account themselves.
- To qualify, you must be making student loan payments and have a direct legal obligation to repay the loan (guarantors do not qualify).
- Parents paying installments on Parent PLUS loans* taken out for their children's education are also eligible.
- Total matched loan payments and direct 401(k) contributions combined cannot exceed the annual federal IRS deferral limit ($24,500 for 2026, excluding catch-up contributions).
The provision could help address an increasingly common financial dilemma: Some people with student loan debt might not have enough money to make student loan payments and, at the same time, contribute enough to a 401(k) to receive an employer match.
As Kiplinger recently reported: "According to the American Institute of CPAs (AICPA), over half (53%) of personal and parent borrowers say student debt directly hinders their ability to save for retirement. For these households, the default reaction may be to reduce or even pause monthly 401(k) contributions."
But this is optional for employers. Not every workplace retirement plan offers student loan matching, and the workplace plan's specific rules determine which payments qualify and how the match is calculated.
*Also keep in mind that Parent PLUS loans (and consolidation loans containing Parent PLUS loans) are excluded from the Repayment Assistance Plan (RAP). These loans are now generally at $20,000 per year per student (with a $65,000 lifetime limit).
Check your employer retirement plan documents or ask your benefits administrator whether student loan payments qualify for matching contributions.
Related
