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Are you looking for a way to deduct the money you spent on your student loans? Is your tax professional telling you that it’s not possible? Not so fast! You might be able to write off student loans as a business expense.
The IRS says: “Student loan interest paid by the taxpayer during the tax year is deductible.” This means that if you are self-employed and pay back your student loans, you could potentially get a deduction for the interest payments.
To qualify for this deduction, there are some requirements: First, your business must generate at least $5,000 in gross receipts. Second, only payments made during the tax year can be deducted (so don’t try to deduct payments made in January or February). Third, if you have multiple jobs or sources of income, only payments made from one source—your business—can be counted toward the $5,000 gross receipts threshold requirement. Also note that this deduction isn’t available if you’re married filing separately. Finally, while there are some exceptions (for example, if your employer reimburses you for some or all of these expenses), they don’t apply here because we’ll be using this deduction on our own business income and expenses (and not getting an employer reimbursement).
How do I pay back a student loan when I’m self-employed?
Student loan repayment is the ugly side of university life. It’s a daunting debt as it is, but it can be even scarier for the self-employed. As a freelancer, contractor, or small business owner, your student loan repayments will need to be included on your annual Self Assessment tax return.
Confused about how to go about managing your repayments? Don’t sweat, here’s everything you need to know about paying back a student loan when you’re self-employed.
How much do I need to be earning before repayment starts?
If you took out your loan in England or Wales before 1st September 2012, you will repay your loan under HMRC’s Plan 1. You’ll start repaying your student loan the April after you leave your course. For the 2020/21 tax year, which starts on 6th April 2020, you will need to make repayments if your income is over £372.88 a week or £1,615.83 a month (before tax and other deductions). This is a salary of £19,390 per annum.
You’re on Plan 2 if you’re an English or Welsh student who started your undergraduate course on or after 1st September 2012. The earliest you start repaying is when your income is over £511.05 a week or £2,214.58 a month (before tax and other deductions). This is a salary of £26,575 per annum.
We’ve put these figures into a table so you can see at a glance when you need to start paying pack your Student Loan.
2020/21 tax year Student Loan Repayment salary starts at:
| 2020/21 Earnings (before tax and other deductions) | Plan 1 | Plan 2 |
|---|---|---|
| Weekly | £372.88 | £511.05 |
| Monthly | £1,615.83 | £2,214.58 |
| Per annum | £19,390 | £26,575 |
The equivalent amounts for the 2019/20 tax year were:
| 2019/20 Earnings (before tax and other deductions) | Plan 1 | Plan 2 |
|---|---|---|
| Weekly | £364.13 | £494.71 |
| Monthly | £1577.91 | £2,143.75 |
| Per annum | £18,935 | £25,725 |
can you write off student loans as a business expense
Sole proprietors are business owners who do not have any registered partners that they work with. This does not mean that they do not have investors, it just means that they are only registered owner of their business. While taxes can be expensive for sole proprietors, they can also help with business costs when the business owner learns to take advantage of all of the write-offs they are entitled to. Business owners can write-off just about anything, but there are limitations.
Writing Off The Student Loans
There are thousands of potential business expenses that a sole proprietor can write off to help lower their tax burden, but the principal of their student loans is not one of them. Each student loan payment you make consists of principal, interest and fees. While sole proprietors would like to think that their education should be considered a business expense, the federal government disagrees and does not allow principal on student loans to be tax deductible.
What About The Interest?
If you meet the income requirements set up by the IRS, then you qualify to write off the interest you pay each year on your student loans. It may not sound like a lot, but a student loan of $20,000.00 at five percent interest is a write-off of $1,000.00. This would be enough to drop your taxable income to a lower bracket and significantly lower your tax burden.
Other Write-Offs
The interest on your student loans is not the only write-off you have a sole proprietor. All of the office supplies, postage and printer ink you buy throughout the year is tax deductible. Be sure to keep a detailed log of the miles you drive for your business because that is also a write-off.
If you work from home, then the percentage of your house that you use for business is a write-off up to a maximum. Part of your cell phone and Internet provider bills are also deductible if you use them for business, and any money you pay to maintain the office portion of your home is also tax deductible.
Entrepreneurs spend years in college learning their craft and preparing to start their own businesses. While their education is pertinent to their business, the principal on their student loans is not considered a business expense. But you may qualify to write off the interest on your student loans, and there are plenty of other deductions you can use to lower your tax burden as a small business owner.
How and when do I repay my student loan?
Repayments are made automatically through the tax system and stop once you’ve paid off your student loan in full. This applies whether you’re self-employed or in direct employment.
Full-time courses – you’ll start repaying the April after you finish or leave your course, but only if you’re earning over the repayment threshold. For example, if you graduate in June 2019, you’ll be due to start repaying in April 2020, if you’re earning enough.
Part-time courses – you’ll be due to start repaying the April four years after the start of your course, or the April after you finish or leave your course, whichever comes first, but only if you’re earning over the repayment threshold.
Students who took out loans in Scotland or Northern Ireland are only affected by Plan 1. Repayment thresholds from previous years are available here.
What about a Postgraduate Master’s Loan or Postgraduate Doctoral Loan?
You’re on a Postgraduate Loan repayment plan if you’re an English or Welsh student who took out a Postgraduate Master’s Loan or Postgraduate Doctoral Loan.
If you took out a Master’s loan, the earliest you start repaying is when your income is over £404 a week or £1,750 a month (before tax and other deductions). This is a salary of £21,000 per annum and it’s payable from the first April after you leave your course.
If you took out a Doctoral loan, the earliest you start repaying is when your income is over £404 a week or £1,750 a month (before tax and other deductions). This is a salary of £21,000 per annum and payable from either the:
- first April after you leave your course
- April four years after the course started.
Per annum
| 2019/2020 Earnings (before tax and other deductions) for repaying Masters or Doctoral Postgraduate Loan | Earnings |
|---|---|
| Weekly | £403.84 |
| Monthly | £1,750 |
| £21,000 |
If you’re a Scottish or Northern Irish student who took out a Postgraduate Tuition Fee Loan or Postgraduate Living Cost Loan (Scotland only) you’ll start to repay these once your earnings are at £18,330 per year.
How does this affect me as a self-employed person?
If you complete and return your 2019/20 Self Assessment form to HMRC by 31st October 2020, HMRC will calculate how much you need to pay for student loan repayments, as well as the usual tax and National Insurance contributions. You can get your accountant to perform these calculations for you if you prefer (see below) and include these on your Self Assessment return for submission to HMRC by the deadline of 31st January 2021.
Your tax liability must be paid to HMRC by 31st January following the end of the tax year. HMRC will pass the details of your student loan repayment amount to the Student Loan Company, who will update your loan account accordingly.
What if I didn’t get my Self Assessment in before 31st October?
If you don’t submit your Self Assessment to HMRC by the 31st October, you (or your accountant) will need to calculate the repayment amount and include it on your Self Assessment return. Every student loan holder is required to pay back 9% of their annual gross income that falls above the threshold.
To work out how much you need to pay, you need to:
- Calculate your annual gross income by adding together your gross salary, gross dividends, and any other earnings
- Subtract the threshold that applies to you (either £19,390 or £26,575 from Plans 1 or 2 highlighted above) from your annual gross income to find out how much over the threshold you are
- Calculate your student loan repayment for the year which will be 9% of the remaining amount.
The balance is your annual payment. You must submit your annual Self Assessment and the payment for all outstanding tax liabilities, including your student loan, by the HMRC deadline of 31st January to avoid any fines or penalties.
Some worked examples of repayments
Example 1
Joe took his loan out in Scotland, so he is affected by Plan 1. In the 2018/19 tax year, he has a gross salary of £16,000, with dividends of £12,000 and other earnings of £2,000. To find his annual loan repayment amount, he would:
- Add these amounts together, (making £30,000)
- Subtract the Plan 1 threshold of £18,935 for the 2018/19 tax year (leaving £11,065)
- Calculate 9% of £11,065, giving him the annual loan repayment of £995.85.
Example 2
Sarah took her loan out after 1st September 2012 in England, so she is affected by Plan 2. She has a gross salary of £16,000, with dividends of £12,000 and other earnings of £2,000. To find her annual loan repayment amount, she would:
- Add these amounts together, (making £30,000)
- Subtract the Plan 2 threshold of £25,725 (leaving £4,275)
- Calculate 9% of £4,875, giving her the annual loan repayment amount of £384.75.
Early repayments
There’s no penalty for paying some or all of your loan early.
If you’ve nearly paid off your loan
You can avoid overpaying if you know your loan will be paid off within the next two years. State on your Self Assessment tax return that your loan will be paid off in the next two years. Send your online tax return to HMRC before 1st November to avoid overpaying.
In conclusion, it seems that you can write off student loans as a business expense if you are a self-employed individual. However, if you’re an employee, or if you have student loans and another job, then the answer is more complicated.
The IRS has said that if you’re self-employed and have taken out loans to cover your education costs, then those loans will generally be considered a deductible expense. However, if you’re working for someone else and paying for your education with loans—or paying for any part of your education with loans—then there are some complications.
First of all, it depends on whether or not your employer offers tuition reimbursement as part of its benefits package. If they do, then any money that comes from them will probably not be deductible (although it may be taxable). In this case, the only way to be able to write off student loan payments is if they come directly from you personally.
On top of that complication is another potential complication: what type of loan do you have? If it’s a private loan and not a federal one (or if it’s one where the government is guaranteeing repayment), then it might not qualify for deduction at all—even if your employer does offer tuition reimbursement!
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