School, at all levels, is back in session. In addition to classroom studies, students and their families need to do some homework on how tax breaks can help them cover educational costs.
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Youngsters in my neighborhood are back in classrooms this week. Older students are heading off to their college campuses.
And the parents of all of them are searching for ways to pay educational costs that are growing faster than their children.
Uncle Sam offers some help here. Below is a primer, broken down along the types of tax breaks available to students, parents and even parents who are students.
Educational tax credits: Let’s start with one of the best tax benefits in the Internal Revenue Code (IRC), the tax credit. This type of tax break offsets dollar-for-dollar any tax you owe. Some are refundable credits, meaning they could even get you a tax refund if you don’t owe any tax.
Of course, there are limits, both as to who is eligible and how much a tax credit is worth. But getting to shave any amount directly off your tax bill is great.
When it comes to schooling, taxpayers should check into two popular tax credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLC).
The American Opportunity Tax Credit is worth a maximum $2,500 per eligible student enrolled in college courses. It is calculated as 100 percent of the first $2,000 spent on qualifying education expenses, plus 25 percent of the next $2,000 spent for qualifying college costs.
The AOTC also is partially refundable. Under certain circumstances, up to $1,000 can be returned to eligible taxpayers as a refund.
Expenses that qualify for the AOTC include tuition and certain related expenses required for enrollment or attendance at the student’s college.
The Lifetime Learning Tax Credit lives up to its name. The LLC can be claimed by undergraduate college students, as well as to a broader range of students. This includes those in graduate school and individuals who take courses to acquire or improve their job skills.
The LLC is worth up to $2,000 credit per federal tax return, not per student as is the AOTC case. The LLC amount is calculated as 20 percent of the first $10,000 in tuition expenses paid per year. Also, the LLC is not refundable, so while it can reduce your tax bill to zero, you won’t get any excess LLC back as a refund.
You can use the IRS’ online Interactive Tax Assistant to help determine if you’re eligible for educational either of these two educational tax credits. If so, you’ll claim them using IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), when you file your tax return.
Tax deductions for education costs: Tax deductions help reduce your income to a lower taxable amount. That generally means you’ll pay less tax. This could be the case for filers who can claim one (or several) education-related tax deductions.
Many students take out loans to help pay college costs. Some of the interest on these debts can be of tax benefit as the Student Loan Interest Tax Deduction. This deduction is a maximum of $2,500 of student loan interest paid each year.
The student loan interest deduction could be reduced if your earnings exceed a certain amount. You also must have taken out the loan solely to pay qualified education expenses for you, your spouse, or a dependent.
But the good news is that you don’t have to itemize to claim this tax deduction. It’s one of the more than two dozen income adjustments still referred to as above-the-line deductions. These tax breaks can be claimed in Part II of Form 1040 Schedule 1; the student loan interest entry is line 21 on the 2025 version (the 2026 Form won’t be updated for a while).
The beauty of above-the-line deductions is that you don’t have to itemize to get them. But if you do use Schedule A instead of taking the standard deduction, you still can claim any above-the-line deduction for which your qualify.
Your lender should send you a Form 1098-E (if you paid interest of at least $600 during the tax year) next year to help you figure your student loan interest deduction.
You’ll also need to know your modified adjusted gross income (MAGI), since if those earnings will determine whether you can claim the full $2,500 interest deduction or it is phased out.
You can find more on the student loan interest deduction and income phaseouts in IRS Publication 970, but note that it is the 2025 tax year version. The 2026 MAGI amounts are discussed in more detail in my earlier inflation series post on how the increased costs affect this year’s tax deduction, credit, and exclusion amounts.
Exclusion amounts for school expenses: Speaking of exclusions, there are some education-related instances where benefits are tax-free benefits or certain interest earnings aren’t taxed at all.
The Internal Revenue Code allows employers to provide up to $5,250 per employee per year in tax-free educational assistance. This job benefit covers tuition, fees, books, supplies, equipment, and qualified student loan repayments.
The educational assistance amount that’s excluded from a worker’s income has been fixed since 1979. But beginning with the 2027 tax year, the $5,250 maximum exclusion will be indexed for inflation. That amount will be part of the IRS’ annual inflation adjustments typically announced each fall.
If your workplace offers educational assistance, check with your benefits office for details. You also can review the IRS’ frequently asked questions about educational assistance programs to get some general information on this option.
Then there’s the interest earned on eligible Series EE and I savings bonds. I know, many consider these instruments an archaic way to stash cash.
But interest on these specific series of bonds issued by the U.S. Treasury after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
So, if you do happen to have some around (I had dozens that I bought through a prior employer’s workplace plan) you might want to consider using them to pay for some higher education costs for yourself, your spouse, or a dependent. That way, you won’t owe any federal tax on the interest they earned when you redeem the bonds.
In addition to meeting certain requirements, there’s also an income limit for the education-related savings bond interest exclusion. Again, those details are in my previously mentioned inflation series post.
Another tax exemption is granted for early IRA distributions that are used for certain school-related costs.
Generally, when you take money from a traditional IRA before you reaching age 59½ you must pay a 10 percent tax penalty on the distribution. That penalty is waived when the funds go toward allowable education expenses.
Education expenses that qualify for the 10 percent penalty waiver include tuition and fees, and books, supplies, and equipment required for enrollment or attendance. Students attending at least on a half-time basis can also use penalty-free IRA money to pay room and board. Special needs students can avoid the penalty if the expenses are for any special services incurred in connection with the student’s enrollment or attendance.
Note, however, that you still must pay tax on the tax-deferred IRA amount you withdraw.
If you earn a scholarship or fellowship, the IRS offers some tax consideration for these amounts. A scholarship or fellowship is tax free if the student is a candidate for a degree at an eligible educational institution, and the scholarship or fellowship funds pay qualified education expenses. IRS.gov’s online interview tool can help you determine whether your scholarship, fellowship or grant money is taxable income.
Tax advantaged educational savings options: Financial and tax advisers recommend that rather than raid your retirement savings, you or your parents or you and your parents) save in preparation for college and other education expenses. Your Uncle Sam agrees, and offers help through a variety of tax-advantaged educational savings plans.
529 plans are among the most popular and, in the view of many, the best of the tax-favored options to save for college. Created by Congress in 1996, these accounts officially are designated in the IRC as a “qualified tuition program.” However, they are more commonly referred to by the tax code section 529 that covers their associated tax benefits.
There are two types of 529 plans, a tuition prepayment plan, and a savings (really an investment) plan to which you contribute money to be used later to pay for a student’s qualified higher education costs. The tax-favored savings plan option is the more popular choice, and is the one that typically is referred to in 529 plan discussions.
The tax benefits for a 529 savings plan include account growth that is federally tax-deferred, letting your money compound more quickly since you don’t lose a portion of it to taxes. That tax benefit extends to 529 withdrawals; as long as you use the money to pay for qualified education expenses, Uncle Sam won’t collect a dime. Also, in some instances 529 funds can be used to pay for non-college educational costs.
The One Big Beautiful Bill Act (OBBBA) also makes it easier to use 529 funds in more cases. The new tax law broadens the range of expenses 529 plans can cover for K-through-12, expanding them to assorted pre-college non-tuition expenses, including instructional materials, tutoring, dual enrollment costs, and more. It also doubled the amount parents can withdraw for K-12 expenses from $10,000 to $20,000.
Another OBBBA change allows for 529 withdrawals to pay for “postsecondary credentialing expenses,” including licenses and certificates. And it made permanent the ability to roll over 529 funds tax-free to Achieving a Better Life Experience, or ABLE, accounts for individuals with disabilities.
Contributions to 529 plans, which are state-sponsored and offered in every state and District of Columbia, aren’t deductible on your federal tax return. However, most states that tax residents’ income offer state tax deductions on 529 plan contributions or tax exemptions on withdrawals.
SavingForCollege.com offers its latest 529 plan recommendations, as well as a tutorial on how to open one.
The Coverdell Education Savings Account is another tax-favored way to save for college. Like 529 plans, Coverdell money grows tax free, and distributions to pay for qualified college expenses are tax free, whether incurred at a public, private, or religious school. You also can use the money to pay qualified kindergarten through college costs.
The biggest downside of a Coverdell, however, is its relatively small $2,000 per child maximum annual account contribution limit.
The newest addition to the college saving category is the OBBBA-created Trump Account for young people. Technically, this tax-favored investment vehicle is a retirement option for U.S. citizens age 17 and younger.
Photo by Atlantic Ambience
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Once an account is open for a youngster, you can deposit a maximum of $5,000 a year into it. In specific situations, the federal government will kick off contributions with a $1,000 starter amount to accounts for newborns. There are no tax breaks for the donors, which can include friends in addition to parents and relative, but the money grows tax-deferred.
Employer and employee salary reduction contributions up to $2,500 per employee also are allowed. These contributions are not included in the employee’s gross income, provided they are made through a formal workplace program.
A Trump Account will transition into a traditional IRA when the young person for whom it was opened turns 18 and gets control of the money. In most cases, withdrawals (which will be taxed as ordinary income) will face a 10 percent tax penalty if made before the account owner turns 59½.
But that penalty will be waived if the young person uses Trump Account money to pay for certain expenditures, including eligible education costs.
You can find more on Trump Accounts, and their associated mobile app, at the accounts’ official website.
Professionals can supplement this primer: As this tax-version CliffsNotes on educational assistance shows, there are a variety of such options, each with their own eligibility requirements and limitations.
The IRS never allows double-dipping, which is using the same expenses to claim different tax breaks. But some of the tax-advantaged educational strategies can be combined as long as they aren’t used for the same costs.
So, if you’re a student or the parent of one and need help paying school costs — and who doesn’t nowadays? — it’s a good idea to seek some tutoring from a tax professional familiar with the tax code’s educational breaks.
This bit of tax claim homework should give you plenty to talk with your tax pro about.
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