University of Illinois Extension


Paying for college or any kind of post-secondary education can be expensive. Fortunately, our income tax system has credits, deductions, and other tax breaks for higher education. If you are saving for future expenses, the interest or growth in certain types of accounts is non-taxable income. If you are paying for post-secondary education or paying interest on student loans, you may be able to claim a credit or deduction. Deductions and non-taxable income reduce the amount of income on which you pay tax. Credits reduce the amount of tax you owe.

If you were eligible for a tax break in a previous year but failed to claim it, you can file an amended tax return. You have three years from the date you filed the original return or two years after the date you paid the tax, whichever is later, to file the amended return.

This fact sheet covers eight permanent tax breaks available under the federal income tax system. It includes changes made by the American Taxpayer Relief Act of 2012.Scholarships, business deductions for work-related education, and state income tax rules are not covered. Updates and additional information about saving and paying for college, including the temporary Higher Education Expense Deduction, is posted on the University of Illinois Extension blog, Plan Well – Retire Well.


How to Use This Fact Sheet

Each tax break applies to a particular stage of paying for educational expenses. Tax breaks are discussed in this order:

Saving for future expenses

  • Coverdell Education Savings Account
  • Qualified Tuition Programs (529 Plans)
  • Savings Bond Interest Deduction  

Paying for current expenses

  • American Opportunity  Credit (Hope Scholarship Credit)
  • Lifetime Learning Credit
  • Employer-Provided Assistance                      
  • Penalty-Free Early Distributions from IRAs

Making payments on student loans

  • Student Loan Interest Deduction

The information is organized into five sections:  

Highlights provides an overview of eight different tax breaks currently available.
Eligibility and Limitations provides uses a series of tables to spell out the specific rules for each tax break. Check these to determine whether you may qualify and to compare one tax break to another.

    1. Income, Contribution, and Benefit Limits  
    2. Types of Education Programs Covered
    3. Additional Restrictions and Information
    4. What Expenses are Allowable?
    5. Requirements for Student and Institution

Combining Tax Breaks explains how using one tax break can affect eligibility for others.
Tax Forms and Reporting lists the tax documents you will receive as well as forms or worksheets you will use when filing your taxes. 
Tips and Cautions offers suggestions to help you put this knowledge to work.