Tax Credit for College Students: What You Should Know
College can be costly, and for many students and families, finding ways to reduce expenses is essential. Fortunately, the U.S. tax system offers several education-related tax credits that can help lower what you owe and reduce the overall financial burden of attending college. These credits are designed to offset qualified educational expenses and make higher education more affordable.
In this guide, we’ll break down what tax credits for college students are, the types available, who qualifies, how to claim them, and strategies to get the most out of them.
What Is a Tax Credit for College Students?
A tax credit directly reduces the amount of tax you owe—dollar for dollar. This makes tax credits more valuable than deductions, which simply lower your taxable income.
Education tax credits help cover qualified expenses such as tuition, fees, and required course materials. When used correctly, these credits can significantly reduce your tax bill.
Types of Tax Credits for College Students
Two major federal education tax credits are available:
1. American Opportunity Tax Credit (AOTC)
The AOTC is one of the most beneficial credits for undergraduate students.
Key Features:
- Credit Amount: Up to $2,500 per eligible student, annually
- Refundable Portion: Up to 40% (maximum $1,000) may be refunded even if you owe no taxes
- Eligible Costs: Tuition, required fees, and course materials such as books and supplies
Eligibility Requirements:
- Enrolled at least half-time in a degree or recognized credential program
- Available only for the first four years of post-secondary study
- Income limits apply—phase-out begins for 2025 MAGI over $80,000 ($160,000 for joint filers)
The partial refundability makes the AOTC especially attractive for students with little or no tax liability.
2. Lifetime Learning Credit (LLC)
The LLC is more flexible and can be used for undergraduate, graduate, and professional programs.
Key Features:
- Credit Amount: Up to $2,000 per tax return (20% of the first $10,000 of eligible expenses)
- Refundable: No—this credit can reduce your tax bill to zero but cannot produce a refund
- Eligible Costs: Tuition and required fees; some course materials
Eligibility Requirements:
- Available for an unlimited number of years
- Can be used for part-time enrollment or continuing education
- 2025 phase-out begins at MAGI over $69,000 ($138,000 for joint filers)
The LLC works well for students who have exhausted the AOTC or those not enrolled full-time.
Other Education-Related Tax Benefits
1. Tuition and Fees Deduction (Expired)
Formerly offered up to a $4,000 deduction but discontinued after 2020.
2. Student Loan Interest Deduction
Allows up to $2,500 of student loan interest to be deducted, even without itemizing.
3. Scholarships and Grants
Generally tax-free when used for tuition and required course materials. Funds used for room and board may be taxable.
4. Employer Education Assistance
Employers may exclude up to $5,250 annually from taxable income when offering education benefits.
Education Tax Credit Eligibility Basics
To qualify, you must meet specific IRS criteria:
Qualified Expenses
- Tuition and required fees
- Required course materials
Eligible Institutions
- Accredited colleges, universities, vocational schools
- Must participate in federal student aid programs
Student Requirements
- Must meet enrollment requirements (varies by credit)
- No felony drug convictions for AOTC
Income Limits
- Credits phase out at higher MAGI levels
How to Claim Education Tax Credits
1. Gather Documentation
- Form 1098-T from your school
- Receipts for books, supplies, and fees
2. Complete IRS Form 8863
This form is used to claim both the AOTC and LLC.
3. File With Form 1040
If filing electronically, tax software will guide you through entering education expenses.
4. Keep Records
Keep all documents for at least three years in case of an IRS audit.
Tips for Maximizing Education Tax Credits
- Use the AOTC first if eligible—it offers the greatest value and partial refundability.
- Account for scholarships correctly to avoid reducing your qualified expenses unnecessarily.
- Track all required course materials, even if purchased outside your school.
- Consider using tax software or consulting a tax professional.
- Plan ahead if your income or enrollment status is likely to change.
Common Mistakes to Avoid
- Claiming both AOTC and LLC for the same student in one year (IRS does not allow this).
- Ignoring income phase-out rules.
- Forgetting to include qualifying books and supplies.
- Incorrectly reporting scholarship amounts.
Conclusion
Education tax credits are powerful tools for reducing the cost of college. The American Opportunity Tax Credit and the Lifetime Learning Credit can significantly lower your tax burden and help make higher education more affordable. By understanding how these credits work, meeting eligibility rules, and keeping thorough records, students and families can maximize their financial benefits.
With thoughtful planning—and by taking advantage of all available education credits and related tax benefits—you can make college expenses more manageable and achieve your academic goals with greater financial confidence.