Education and Student Loan Tax Breaks After 2025: What Students, Graduates, and Parents Should Know

Overview

Tax policy has played a major role in helping families manage higher education costs and student debt. Current rules provide deductions and credits that reduce tax liability for eligible tuition payments, loan interest, and education expenses. As several tax provisions approach expiration at the end of 2025, households may see changes to how educational benefits are calculated and who qualifies for them. Monitoring these developments early allows borrowers and students to make informed decisions for the 2025–2026 academic and tax years.

Current Education and Student Loan Tax Benefits (2025 Tax Year)

Student Loan Interest Deduction

• Taxpayers may deduct up to $2,500 of student loan interest from taxable income each year — an above‑the‑line deduction that does not require itemizing. This is still part of the tax code. 

American Opportunity Tax Credit (AOTC)

• A credit of up to $2,500 per eligible student for the first four years of undergraduate education.

• Up to 40% of the credit can be refundable for qualifying taxpayers.

• Income‑based phaseouts apply under current law. 

Lifetime Learning Credit (LLC)

• A non‑refundable credit of up to $2,000 per return for qualified education expenses, including graduate school, workforce training, and lifelong learning.

• Income limits apply. 

Employer‑Provided Educational Assistance (Including Student Loan Repayment)

• Under IRC Section 127, employers can provide up to $5,250 per year tax‑free for education assistance. OBBB made this benefit permanent and indexed for inflation starting in 2026. This includes tax‑free student loan repayments, which had been a temporary benefit prior to OBBB.

Changes That Take Effect in 2026 and Beyond

Permanent Student Loan Repayment Assistance

• Employer payments toward an employee’s student loans (including both principal and interest) remain tax‑free under IRC Section 127.

• The yearly limit will be indexed for inflation starting in 2026.

Other Education‑Related Provisions Under OBBBA

• The law preserves existing credits and deductions such as the AOTC, LLC, and student loan interest deduction without scheduled expiration. However, future legislation could amend income phaseouts or adjust amounts. 

• Other changes (not directly education credits) such as new deductions and other tax features under OBBBA do not directly eliminate these education benefits.

Students & Parents:

• You remain eligible for the AOTC ($2,500) and LLC ($2,000). However, OBBBA now requires a valid Social Security Number (SSN) (not an ITIN) to claim these credits starting with 2026 tax returns.

Borrowers with Student Loans:

• The $2,500 interest deduction is now permanent. Starting in 2026, any loan forgiveness (except PSLF or death/disability discharge) is now taxable income.

Employees Receiving Assistance:

• The $5,250 tax-free employer repayment benefit is now permanent. The cap remains at $5,250 for 2026 but will be inflation-indexed starting in 2027.

Strategic Planning for 2026

• Lock in "Legacy Status" by June 30: The OBBBA significantly restricts federal borrowing. If you need Grad PLUS (now eliminated for new students) or Parent PLUS (now capped at $20k/year), ensure your first loan is disbursed before July 1, 2026. This "Legacy" status allows you to bypass new caps for up to three years.

• Prepare for the "Tax Bomb": The federal tax exemption for student loan forgiveness expired on December 31, 2025. Unless you qualify for PSLF or a discharge due to death/disability (which OBBBA made permanent), any loan forgiveness in 2026 is taxable income. Start a tax fund now to cover the expected 1099-C liability.

• Leverage Permanent Employer Aid: Under Section 127, your employer can still pay up to $5,250 of your loans tax-free. This benefit is now permanent. While the $5,250 cap stays the same for 2026, it will be indexed for inflation annually starting in 2027.

• Maximize the LLC & 529 Expansions: The LLC remains at $2,000, but OBBBA now allows you to use 529 Plan funds tax-free for a wider range of "post-secondary credentials," including professional certification fees and exams, which aligns with LLC eligibility.

• Verify SSN Compliance: A strict OBBBA requirement for 2026: You must provide a valid Social Security Number for the student and the taxpayer to claim the AOTC or LLC. ITINs are no longer sufficient for these credits as of today.

Summary of Changes:

• Grad PLUS and Parent PLUS: New borrowing restrictions with a cap on Parent PLUS loans at $20k/year.

• Student Loan Forgiveness Taxability: Loans forgiven after 2025 will be taxable unless qualifying for PSLF.

• Lifetime Learning Credit: Increased to $3,000 and now covers credentialing exams.

• Employer Student Loan Assistance: Section 127 benefits remain permanent, with inflation indexing starting in 2027.

• SSN Requirement for Education Credits: ITINs are no longer accepted for AOTC and LLC starting in 2026.