Charles Trautman, EA · Since 1969
Beyond the education credits.
The education credits get the attention, but most families save through 529 plans and pay with loans. The 2025 tax law widened what 529 money can be used for, Colorado gives one of the best state deductions in the country for saving, and student loan forgiveness became taxable again for some borrowers in 2026.
For 2025 and 2026. For the American Opportunity and Lifetime Learning credits, see Education Tax Credits.
Money in a 529 grows tax-free, and withdrawals are tax-free when they pay qualified expenses for the beneficiary.
| Expense | Rule |
|---|---|
| College or trade school tuition and required fees | Yes, at any eligible school, including many abroad |
| Books, supplies, computers, software and internet | Yes, if used by the student while enrolled |
| Room and board | Yes, if enrolled at least half-time. Off campus, limited to the school’s published room-and-board allowance |
| K–12 tuition | Up to $10,000 a year per student for 2025; $20,000 from 2026 |
| K–12 books, tutoring, testing fees and educational therapies | Yes, since July 4, 2025, within the same yearly limit |
| Registered apprenticeships and recognized credential programs | Yes; credential and licensing programs added July 2025 |
| Student loan payments | Up to $10,000 lifetime per borrower, plus $10,000 for each sibling |
| Rollover to the beneficiary’s Roth IRA | Up to $35,000 lifetime, if the 529 has been open 15 years, within the yearly IRA limit, and not from contributions of the last five years |
| Transportation, health insurance, sports fees | No |
Withdraw in the same calendar year you pay the expense. Form 1099-Q goes to whoever receives the money: paying the school or the student directly can keep it off the parents’ return.
Colorado lets you subtract contributions to a CollegeInvest 529 plan from your Colorado income, up to a limit per beneficiary.
| 2025 | 2026 | |
|---|---|---|
| Single filer, per beneficiary | $25,400 | $26,200 |
| Joint return, per beneficiary | $38,100 | $39,200 |
Anyone who contributes can take the deduction on their own Colorado return, including grandparents. At 4.4%, a $10,000 contribution saves $440 of Colorado tax.
Some families run tuition through a CollegeInvest account just before paying it, to capture the Colorado deduction. Contributions must be made by December 31.
Deductions you took come back into Colorado income if you make a nonqualified withdrawal or roll the money to another state’s plan. The principal of a rollover into CollegeInvest is now deductible.
When 529 money isn’t used for qualified expenses, the earnings part of the withdrawal is taxed and hit with a 10% penalty. Your original contributions come back tax-free.
The same dollars can’t count for both the American Opportunity credit and a tax-free 529 withdrawal. Usually the best plan is to pay $4,000 of tuition from other money to get the full $2,500 credit, and use the 529 for everything else.
If your child gets a scholarship, you can withdraw up to the scholarship amount without the 10% penalty. The earnings are still taxed. The same applies to military academy appointments, and the penalty is waived on death or disability.
Change the beneficiary to a sibling, cousin, parent or yourself without tax, keep it for grandchildren, or use the Roth IRA rollover over several years.
Up to $2,500 a year of interest on qualified student loans, deducted whether or not you itemize. Your lender reports the interest on Form 1098-E.
For 2026 the deduction phases out between $85,000 and $100,000 of modified AGI for single filers, and between $175,000 and $205,000 for joint returns. For 2025 the joint range was $170,000 to $200,000.
Only the person legally obligated on the loan, who actually paid the interest. Married couples must file jointly. You can’t take it if someone can claim you as a dependent.
If the loan is in the child’s name, the parent can’t deduct it, but the IRS treats the payment as made by the child, who can deduct it if not a dependent. Parent PLUS loans are deductible by the parent.
Still qualify, as long as the new loan only refinanced qualified student loans, not other debt.
Student loan forgiveness was tax-free from 2021 through 2025. From 2026, forgiveness under income-driven repayment plans is taxable federally, and generally in Colorado too, unless you’re insolvent. (See When forgiven debt is income.)
Public Service Loan Forgiveness, teacher loan forgiveness and other work-based programs, and discharges for death or total and permanent disability.
An employer can pay up to $5,250 a year toward your student loans, or your tuition, tax-free. The 2025 law made this permanent, and the limit rises with inflation after 2026. It’s worth asking about.
Scholarships are tax-free when they pay tuition, required fees, books and supplies for a degree student. The part used for room, board or travel is taxable income to the student. So is a scholarship that requires teaching or research work in return.
Sometimes a family comes out ahead by treating part of a scholarship as paying room and board, making that part taxable to the student, often at a low rate or none, so that tuition paid with family money qualifies for the $2,500 American Opportunity credit. It takes careful figures, but it can be worth more than $1,000 a year.
Yes, for tuition up to $10,000 a year for 2025 and $20,000 from 2026, plus books, tutoring and testing fees since July 2025. On the Colorado side, talk to us before a K–12 withdrawal from a CollegeInvest account, since Colorado deductions you took on those contributions can be recaptured if the state doesn’t treat the withdrawal as qualified.
You can withdraw up to the scholarship amount without the 10% penalty; only the earnings are taxed. Or keep it for graduate school, change the beneficiary, or roll some into his Roth IRA over time.
Yes. Contributions to a CollegeInvest plan are subtracted from Colorado income, up to $26,200 per beneficiary single or $39,200 joint for 2026. Grandparents can take it too.
Not if the loan is in her name. If she isn’t your dependent, she can deduct it as though she paid it herself. Parent PLUS loans in your name are deductible by you, within the income limits.
For forgiveness after 2025, generally yes, unless you’re insolvent at the time. Public Service Loan Forgiveness is still tax-free.
Bring the 1098-T, 1099-Q and scholarship letters. We’ll decide which dollars pay which bills to get the most out of the credits and the 529. Taxes can be tough, but the Tax Shop has your back.