Are Interest Payments on University Payment Plans Tax-Deductible?

Understanding the Tax Rules Around University Payment Plans

Are you on a university payment plan where you pay tuition in installments? If you are, then you’re probably wondering if you’re eligible for a tuition payment plan tax deduction. Read on and find out more about tax rules related to interest payments on tuition payment plans.

But let’s first discuss why university payment plans are popular. The rising college costs, or tuition inflation, is the foremost reason among students.

From 2010-2011 to 2022-2023, tuition inflation averaged 3.63% per year. Even at public four-year universities, tuition increased by 36.7% in the same period.

In 2024-2025, average sticker prices ranged from $29,900 (in-state) to $63,000 (private) per year. Even with financial aid, the costs are still an issue – $20,800 and $36,300 per year, respectively. Ivy League schools have the highest costs, too, from $80,000 to $90,000 per year.

This is where university payment plans come in. Students pay their tuition and fees in regular installments, not in one lump sum. Most universities have one form or another of tuition payment plans, too. Almost  4 million students use them every term.

While most university payment plans don’t charge interest, many do. This brings us to the question, “Are university payment plan interest payments tax-deductible?”

Unfortunately, the answer is usually “No”. Be sure to read on and learn the reasons why.

What Is a University Payment Plan?

A university payment plan is also known as a tuition payment plan or an installment payment plan. The alternative financing option allows students to spread tuition payments.

Note that university payment plans aren’t federal student loans. There’s no borrowing involved and no long-term interest being charged. Instead, these allow students to pay in regular installments throughout the academic term.

Furthermore, university payment plans aren’t offered by the federal government. Instead, these are directly offered by the university or a third-party provider.

UC Berkeley, Penn State, and Arizona State offer university payment plans. Third-party providers include Campus Commerce, Flywire, and Denefits.

Here are the key features that university payment plans share.

Regular installment payments

Let’s say you have a net college bill (gross tuition and fees, less financial aid) of $5,000 for the semester. In a traditional payment system, you’ll pay $5,000 upfront, usually before classes start. But in a university payment plan, you can pay the $5,000 in five monthly payments (i.e., $1,000/month).

Usually no interest

Most plans don’t charge interest, a definite advantage over student loans. However, colleges usually charge fees, such as enrollment, administrative, and late fees.

Direct payment arrangement

Students pay their installments through various methods. Direct bank transfers, debit and credit cards, and e-checks are common.

Usually covers tuition and mandatory fees only

This is the norm among university payment plans. But there are cases when the on-campus room and board are covered. Ask your financial aid officer about the specific coverage.

No credit check

Applicants usually don’t undergo a credit check, but eligibility rules apply. Being enrolled for the current term and without payment backlogs is common.

University payment plans offer many benefits for college students and their families.

• Improve cash flow management through regular installments.
• Decrease reliance on the use of credit cards and student loans.
• Make college education more accessible.

But these plans also have their downsides. Be sure to consider these common issues, too.

• Fees can add up, especially for late payment fees.
• Consequences for late payments include dropped classes, registration holds, and denied transcripts.
• Changing the payment schedule isn’t easy and, in some cases, involves extra fees.

And then there’s the matter of interest payments, if any, and their effect on taxes.

Is the Interest on These Plans Tax-Deductible?

Ask relevant questions when you’re signing up for a university payment plan. You’ll then get into it with realistic expectations and maximize its benefits.

A relevant question is, “Can you deduct college payment plan interest on your taxes?” Getting the right answer will influence your decision to sign up or not.

Start by understanding the IRS education tax benefits. These include education credits and tax deductions, which are different concepts.

The IRS defines “qualified education expenses” as specific education-related expenses eligible for one or more tax benefits.

What exactly does the IRS consider qualified education expenses? The list is short and covers:

• Tuition and mandatory fees (e.g., enrollment fees)
• Course-related expenses required for enrollment

The longer list of non-qualified education expenses includes:

• Living expenses
• Room and board
• Insurance
• Medical expenses, including student health fees
• Transportation
• Optional fees or services (e.g., student activity fees and athletic fees)
• Loan origination fees

Qualified education expenses may be used in two ways, namely:

• To claim education tax credits, as is the case for LLC and AOLC
• To claim education tax deductions, as is the case for student loan interest deduction

Your eligibility for either a tax deduction or a credit depends on many factors, including:

• Your Modified Adjusted Gross Income (MAGI)
• The type of education expense
• The nature of postsecondary education (e.g., degree, certificate, or professional development) 

With that being said, does the IRS consider interest payments on university payment plans tax-deductible? Under the current student payment plan tax rules, the answer is no. This rule also applies to charges related to these plans.

Let’s say you paid hundreds of dollars in interest payments and fees under a university payment plan. The late payment fees can be worrisome. But even small fees, such as the setup, service, and administrative fees, add up.

Regardless if these are education-related costs, you can’t claim them as tax deductions. This is true even if the interest payments and fees were directly related to qualified education expenses.

In contrast, federal student loan interest payments are tax-deductible. There’s no need to itemize deductions, too, in claiming the benefit. This is because of its nature as an “above-the-line” deduction (i.e., it directly decreases your AGI).

Interest payments made to eligible private education loans are also tax-deductible. However, the private education loan must be used solely for qualified education expenses. Also, it must have been taken out for an eligible student’s use.

The private education loan must also be issued by a qualified lender, as defined by the IRS. Sallie Mae, Discover Student Loans, and Social Finance, Inc. are qualified lenders. If it’s a personal loan, such as from an employer or relative, interest payments aren’t tax-deductible.

Other Education Tax Deductions You Might Qualify For

Paying for college is a real struggle for many college students and their families. If you relate to it, you must explore every possible tax deduction for college tuition. You’ll find that doing so can lead to significant money savings on your college costs.

Here are three of the best education-related tax write-offs that you can explore.:

The American Opportunity Tax Credit (AOTC)

The AOLC is a partially refundable tax credit available during the first four years of college. Eligibility requirements include that the student must:

• Be pursuing a degree or certificate
• Be enrolled at least half-time for at least one academic period during the tax year
• Not have completed four years of postsecondary education before the start of the tax year
• Not have claimed the AOTC for more than four previous tax years
• Have no felony drug convictions at the end of the tax year

The maximum AOLC is $2,500 per eligible student per year. Up to $1,000 is refundable. Income limits (MAGI) apply. Applicants can receive full, partial, or no credit depending on their MAGI.

Qualified education expenses under the AOLC are:

• Tuition and mandatory fees
• Course materials, including books, supplies, and enrollment necessary for classes

Room and board, insurance, transportation, and medical expenses aren’t covered.

The Lifetime Learning Credit (LLC)

The LLC is a nonrefundable tax credit for undergraduate, graduate, and professional students. Learners gaining job skills can also apply. Plus, it’s available for unlimited years, unlike the AOTC.

Eligibility requirements for the LLC are:

• The student must be enrolled in an eligible educational institution. All levels can apply.
• The student must enroll in at least one course during the tax year.

There’s no felony drug conviction limitation, unlike the AOTC. But income limits (MAGI) apply, too, although these are different from the AOTC.

The maximum credit is up to $2,000 per tax return (i.e., not per student, unlike the AOTC). Qualified education expenses include:

• Tuition and mandatory fees
• Course-related expenses, including books and supplies, must be required for enrollment.

Both the AOLC and LLC use the IRS Form 8863 — Education Credits for filing purposes. You must also secure  Form 1098-T from the school.

The Student Loan Interest Deduction

This is a federal tax deduction where a taxpayer can deduct up to $2,500 per year in interest paid on qualified student loans. Eligibility requirements include:

• The student loan must have been taken out for the sole purpose of paying for qualified higher education expenses.
• It must be for you, your spouse, or your dependent.
• The student loan must be borrowed from a legitimate lender (e.g., Sallie Mae). Personal loans aren’t qualified. Parent PLUS loans, however, qualify under certain conditions.
• The student must have been enrolled at least half-time in a certificate, degree, or other program.
• You must have paid the interest on the student loan during the tax year.

Income limits (MAGI) also apply. Note that the deduction only applies to the interest payment, not the principal payments.

If it’s your first time exploring these options, you may want to consult with a tax advisor. You should also refer to official IRS sources to get reliable information.

How to Track Education Expenses for Tax Time

Being organized is a must if you want to claim education tax credits. This is also true if you want to keep track of your qualified education expenses. Here are useful tips to achieve it.

• Keep all receipts, documents, and records related to qualified education costs. These include payments for tuition, mandatory fees, and required course materials.
• Keep the receipts for payments of non-qualified education costs. Your tax professional can use the university installment plan tax info to distinguish between qualified and non-qualified expenses. Not only is it vital for accurate reporting but it can maximize your tax benefits.
• Be familiar with Form 1098-T Tuition Statement. It is a form that colleges send to the IRS and students. It’s crucial in determining your eligibility for education tax credits.
• Compare the information on your Form 1098-T Tuition Statement with your personal records. Check for accuracy and completeness. Contact the financial aid or bursar’s office in case of issues.
• Classify your education expenses by semester (fall, spring, and summer) and calendar year (January to December). This way, you can achieve tax alignment and maximize your benefits.
• Keep separate records for your student loan payments and payments under a university payment plan. Note that college tuition interest fees taxes aren’t claimable as qualified education expenses.

It can be a little overwhelming at first. But neither guess about these matters nor second-guess yourself. Instead, consult a tax professional who knows how to claim education expenses on taxes.

Final Thoughts: Know What Qualifies Before You File

In conclusion, most university payment plan fees and interest are not tax-deductible. You may want to consider this fact when deciding to enroll in a tuition payment plan.

The tuition, mandatory fees, and required course materials usually qualify for tax credits. Explore your eligibility for AOLC, LLC, and Student Loan Interest Deduction. You can qualify for up to $2,500 per year.

When in doubt about your eligibility, process, and papers, talk with a tax advisor first. Ask your school’s financial aid officer or bursar’s office, too. Remember, you have a village that can help you take full advantage of tax education benefits.