Tax time is nearly upon us, and for parents, it can be even more confusing. Along with accounting for income and property-related expenses, you also have dependents to factor in — and, in many cases, college educations.
With student debt towering at about $1.6 trillion, it’s hard to find a family that’s not impacted by these loans. If you’ve taken out Parent PLUS loans, there are some important factors to take into consideration as Tax Day draws near.
What Is a Parent PLUS Loan?
Parent PLUS loans, officially referred to as Direct PLUS loans, are federal student aid that can be taken out by parents of dependent undergraduate students to help them pay for college. The loans are dispersed with fixed interest rates (7.08% at the time of this writing), and borrowers can take out as much as they want, up to the student’s total cost of attendance minus other types of financial aid they receive.
In addition to interest, Parent PLUS loans are subject to a loan fee, which is calculated and deducted from each disbursement of the loan.
While Parent PLUS loans can be pricey aid options, they are eligible for the student loan interest deduction that may allow you to take up to $2,500 off your taxable income if you’re eligible.
But in order to get that deduction, you need to know what you’re doing when you file — and there are a few other things you should keep in mind, too.
What You Need to Know Before Tax Time
If you’ve taken out Parent PLUS loans, here’s what you need to know before April 15 rolls around.
If you’re a high earner, you may not qualify
Not every borrower qualifies for the student loan interest deduction. Income-based phase-outs apply. In 2019, borrowers earning more than $70,000 (or $140,000 for joint filers) will see a reduced deduction, and borrowers earning more than $85,000 (or $170,000 for joint filers) will be disqualified from the deduction entirely.
Form 1098-E is important
Once the first quarter hits, lots of tax forms start floating around. It’s easy to lose track of what’s what.
But if you plan to pursue the student loan interest deduction, you’ll need IRS Form 1098-E, the Student Loan Interest Statement. This form is issued by your student loan servicer and will list the total amount of student loan interest collected during the annual period. Providers are required to issue this form if you’ve paid at least $600 in interest, and you can request it if you’ve paid less.
The information in Form 1098-E will help you prove you qualify for the student loan interest deduction — so it’s a good one to keep an eye out for. And remember that if your student loans have been refinanced or consolidated, the form may come from a different loan servicer than you’re used to.
You can only qualify for up to $2,500 — no matter how many students you support
If you’re supporting multiple students through their undergraduate careers at the same time, it’s important to understand that the $2,500 student loan interest deduction limit applies per tax return, not per person. So even if you have two or more dependents racking up interest on their loans, you’ll only be able to claim $2,500 toward a tax deduction.
You may be eligible for other educational tax credits
That said, there are other tax credits you may qualify for if you’re the parent of a dependent undergraduate student — namely, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
While you can’t claim both of these credits, you can file for either alongside the student loan interest deduction. The AOTC is offered on a per-student basis and can offer up to $2,500 in tax credits each year. The LLC can earn you up to $2,000 per year, but is also assessed on a per-tax-return basis.
You’re the one on the line for repayment, no matter what happens
As students get older, shifts happen in who gets to claim educational tax deductions and credits. But no matter what happens with other types of student loan aid, when it comes to Parent PLUS loans, it’s the parent who’s responsible for repayment.
So as you’re reviewing your documents in preparation for tax season, you might want to make a plan for how you’ll take care of your PLUS loans for the remainder of their term.
Refinancing Your PLUS Loans Could Help You Save Money
Even with the student loan interest tax deduction, Parent PLUS loans can place a heavy financial burden on families. Their 7.08% interest rate is substantially higher than the 4.53% average for undergraduate loans, and that’s not counting the 4.236% loan fee.
Fortunately, an increasing number of banks and lenders are working to offer lower-interest refinancing and consolidation options to the recipients of Parent PLUS loans. Although paying off debt is the ideal long-term solution, a more generous set of terms and interest rates can make that goal more achievable.
Finally, if you have any questions or concerns about your tax return, consider hiring a CPA or other tax professional. Expert advice is an additional cost, but it can help ensure your return is filed accurately the first time around.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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