Understanding Tuition Payments and Tax Forms
Here, we’ll discuss the 1098-T form and how it relates to a tuition payment plan. This is an important topic for parents and college students for these reasons.
- When and how tuition is paid can affect what’s reported on the 1098-T form. This is true whether you paid in full (i.e., upfront) or in installments (i.e., tuition payment plan).
- What’s on the 1098-T Form affects a parent’s or student’s eligibility for education tax benefits. The AOTC or American Opportunity Tax Credit or and LLC or Lifetime Learning Credit are the foremost examples.
- When tuition payments are made in an installment plan will affect tax reporting. If payments are made across tax years, discrepancies may happen if they aren’t tracked properly.
The 1098-T form reports payments made during the calendar year. But installment plans can spread payments across tax years. For example, one payment can be in December 2024, and the rest can be in January 2025.
This timing influences when tuition payments are reported to the IRS. It also affects when tuition payments are eligible for education tax credits.
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What exactly is the 1098-T form? It is a tax document that eligible colleges provide to help parents and students claim education tax benefits.
Then, what is a tuition payment plan? Colleges offer this alternative financing option to help parents and students manage college costs. Instead of one lump-sum payment, it allows for smaller payments over a term (i.e., installment).
If you’re a parent of a college student or a student yourself, you’ll want to know how each one relates to the other.
What Is a 1098-T Form?
The 1098-T Tuition Statement Form is an official IRS-mandated tax form. The IRS requires eligible colleges and universities to issue the 1098-T form to their students or their parents. The students or their parents must have paid qualified education expenses during the tax year.
Why is it issued in the first place? As stated above, it helps parents and students to determine their eligibility for education tax credits. Understanding it is also vital in filing accurate and complete tax returns. Plus, it can help in decreasing your overall tax liability.
The students or their parents receive the 1098-T form. But there are conditions when colleges issue the form. A student will receive it if:
- They were enrolled in at least one for-credit course during the calendar year.
- They paid qualified tuition and related expenses (QTRE) during the calendar year.
From the above eligibility requirements, we can make the following conclusions.
- Students who receive full tuition and full-ride scholarships usually don’t receive the form. This is also true for students whose entire tuition was paid by scholarships, grants, and other forms of non-taxable aid. Students whose tuition was completely waived, such as through employee benefits or military service, may not also receive it.
- Students enrolled in non-credit courses usually don’t receive it either. International students, including nonresident aliens, may also be excluded.
But students can always request the 1098-T form even if their school isn’t required by law to issue it. The form can be used to verify the amounts of their financial aid and tuition payments.
What information is included in the 1098-T form? You’ll find the following key information for tax filing purposes.
Box 1: Payments received for QTRE, including the amounts billed and paid during the calendar year
Box 5: Total of scholarships and grants received by the student and processed by the college
Other boxes contain information about the student’s enrollment status and adjustments to prior years’ amounts.
Colleges and universities issue the 1098-T form by January 31 every year for the previous tax year. The form is made available electronically or mailed to its recipients. The bursar’s office is the office typically in charge of its issuance.
Why does the 1098-T form matter during the tax season? Again, its importance lies in determining eligibility for and claiming education tax credits.
The form states how much you spent on QTRE that, under IRS rules, only includes:
- Tuition
- Mandatory enrollment fees
- Course-related fees are required for all students in an academic program
- Laboratory fees, but only if these are mandatory for enrollment or attendance)
- Fees for books, supplies, and equipment, but only if these must be directly purchased from the college
Education tax credits help offset the cost of college. The AOTC offers up to $2,500 per student per year with up to $1,000 refundable. The LLC provides up to $2,000 per tax return for QTRE.
Also, the form can show taxable income that may have escaped your attention. If your scholarships and grants exceed your QTRE, the excess may be considered taxable income.
Indeed, the 1098-T form is a vital document for parents and students for tax and cost-saving purposes. Being familiar with it can lead to significant savings on college costs.
How Tuition Payment Plans Work
Tuition payment plans are alternative financing arrangements with these main features:
Offered by most colleges and universities
Many public and private institutions offer tuition payment plans. Examples include NYU, UC Berkeley, and Harvard.
But there are also third-party service providers that offer them. Sallie Mae, Discovery, Nelnet, and TouchNet are popular.
Allow students and their parents to pay for tuition and fees in installments
Instead of a one-time, lump-sum payment at enrollment, students pay in smaller payments. These are scheduled payments over a specific term, such as a semester or an academic year. The most common is monthly installments, but it can also be twice a year.
Note that the overall cost of tuition and fees isn’t reduced. The amount is divided into the agreed number of scheduled payments. The overall cost of tuition and fees is usually net of scholarships, grants, and other financial aid.
Usually no interest, but with fees
Most plans don’t charge interest, and thus, these are better options than student loans. But fees are common, so it’s always a good idea to check.
Enrollment/setup, late payment, and administrative fees are common and range from $25 to $100. These add up over time, so consider them in your decision.
Does the 1098-T Include Payment Plans?
The 1098-T form is among the most important documents for reporting tuition on taxes. Students and parents on tuition payment plans usually ask if their payments are included in it.
Known as the college tuition tax form, the 1098-T form reflects QTRE payments in Box 1. The payments must have been made during the calendar year.
These must fall into one of these three categories to qualify:
- Direct payments made by a student or their parents
- Payments are made through scholarships, grants, and 529 plans, among other third-party sources
- Payments are made through tuition payment plans by either the college or a third-party provider. In the case of third-party providers, the payments must have been applied to QTRE.
So, to answer the question, “Does the 1098-T include tuition payment plans?” it’s a yes. But only tuition payments are considered QTRE, as discussed above.
What, then, are the education-related expenses excluded from the 1098-T?
- Room and board
- Transportation and traveling expenses
- Insurance
- Medical expenses, including student health fees
- Fees related to tuition payment plans
- Other expenses are excluded as QTRE under IRS rules
The timing of payment matters, too. Keep in mind that the 1098-T is based on the calendar year (January 1 to December 31). It isn’t based on the academic year (August or September to May or June of the following year).
As such, only payments made within the current calendar year will likely be reflected on said year’s 1098-T form. Payments made in the succeeding calendar year will not be reflected.
Let’s say you made a $1,000 payment in December 2025 for a semester starting in January 2026. Said payment will likely appear in the 2025 1098-T form.
How to Report the 1098-T on Your Taxes
If you receive a student tax form 1098-T, you must take advantage of the opportunity that comes with it. You may be eligible for the AOTC or the LLC. Both offset the cost of postsecondary education and, thus, are worth your time and effort.
Here’s a basic step-by-step guide on how to use the 1098-T form.
- Secure your 1098-T form from your college’s bursar’s office.
- Determine your eligibility for either the AOTC or the LLC. The AOTC is available for the first four years of postsecondary education. The LLC has no restrictions on the number of years you can claim it, and it applies to all levels of postsecondary education.
- Calculate your QRTE. If Box 5 exceeds Box 1, you may not qualify for education tax credits.
- Use IRS Form 8863 (Education Credits). Be sure to attach it to your Form 1040, the federal income tax form for individual taxpayers. Use tax software to calculate your education tax credit automatically.
- Keep relevant documentation that supports your 1098-T. These include school billing statements and receipts for QTRE payments. If you’re on a tuition payment plan, keep the records of payment dates, too. You’ll need them in case of an IRS verification.
You may also want to consult with a tax professional. Accurate and complete information is a must for tax filing purposes.
Common Mistakes to Avoid
Doing so can reduce the risk of making these common mistakes. Even a small mistake can result in your ineligibility for education tax credits. Plus, there’s the possibility of an IRS audit to think of.
- Misreporting the payments made during the calendar year in Box 1. Report only actual payments made.
- Forgetting to fill in the scholarship and grant amounts in Box 5. If you don’t subtract these financial aids, you may claim education tax credits you’re not qualified for.
- Failing to match the information in your tax forms and the 1098-T. Check that your full name, Social Security number, and amounts on both forms match.
- Claiming the AOTC more than four times per student.
- Failing to complete and attach Form 8863 to your Form 1040. You won’t claim any credit if you fail to do so.
Don’t forget to perform a manual review, too, even if you use tax software.
Tax Benefits for Tuition Payments
The American Opportunity Tax Credit (AOTC) is a high-value education tax credit with these major features.
- Students must be enrolled at least half-time in a certificate or degree program. They must be in their first four years of postsecondary education, too.
- The $2,500 credit includes 100% of the first $2,000 in QRTE and 25% of the next $2,000.
- Up to $1,000 is refundable even if you don’t have a tax liability.
- Students with drug felony convictions aren’t eligible.
The Lifetime Learning Credit (LLC) is also a high-value credit, but offers more flexibility. It’s also available to undergraduate, graduate, and professional development students. Part-time students and students taking job-related courses are also eligible.
Unlike the AOTC, the LLC is a non-refundable credit. You may have a zero tax bill, but you won’t get a refund.
You can’t claim both the AOTC and LLC for the same student in the same year. As such, you should choose based on which credit provides the highest benefit.
Be sure to explore other education tax credits, too. Start with 529 plans and student loan interest deduction.
Final Tips for Students and Parents
If you’re a newbie, it’s a challenge to navigate college tuition and taxes. You have to familiarize yourself with forms, rules, and deadlines. It’s easy to overlook possible cost savings in your desire to be done with it all.
But why quit when you can persist and learn the system? Start by learning about education tax credits and their process. Be organized in keeping records and tracking payments. Use tax software and take advantage of official IRS resources.
Most importantly, consult a tax professional. Even if it’s just a one-time consultation, you’ll learn insider tips.