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Does Financial Aid Count as Income on My Tax Return?

With the rising cost of a college education, it’s nearly impossible to attend school without receiving some form of financial aid. For most students, this means taking out student loans. Some, however, may also receive grants and scholarships to help reduce their out-of-pocket expenses. Work-study programs and fellowships can also ease the financial strain. If you’re a degree-seeking student, most of your financial aid is tax-free, but it’s not always cut and dry. There are some instances where your financial aid may count as income and must be claimed on your tax return.    

When Does Financial Aid Count as Income?

If you’re a non-degree student, the full amount of any financial aid you receive (excluding loans) is always considered taxable income. This includes money spent on tuition and other qualified educational expenses. Private and federal student loans, however, are not considered income when they are disbursed, regardless of your status. This is because you are expected to pay back the money at some point.

Scholarships, Fellowships & Grants Used for Other Expenses

Scholarships, fellowships, and grants used for tuition and fees required for attendance are tax-exempt if you’re a degree-seeking student. This includes course-related expenses, such as books, supplies, and equipment required of all students for enrollment at an eligible institution. If you use the funds for room and board, travel, or other purposes, however, you must report them as taxable income. Any scholarship or grant paid in exchange for teaching, research, or other services is also taxable.

Work-Study Programs

Students with financial needs are often offered assistance through work-study programs. It’s essentially like having a part-time job that works around your class schedule. And, like other employment, the money you receive through work-study should be reported as earned income on your tax return.

Stipends

Many colleges also offer stipends to students in exchange for work or services. Although these funds may not be reported to the IRS by the institution, they are considered taxable income. Be sure to claim this income when filing your return.

Employer Tuition Assistance

If your employer provides educational assistance benefits, you may receive up to $5,250 annually tax-free. Any amount over that limit should be listed in box 1 of your Form W-2 with wages, tips, and other compensation.

Forgiven or Canceled Student Loans

Generally, any student loan that is forgiven or canceled counts as taxable income. There are, however, certain programs where forgiveness is always tax-free. Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and loans discharged under the Borrower Defense to Repayment Program are all non-taxable. Under the American Rescue Plan Act of 2021, the Biden administration also made all other federal student loan forgiveness programs temporarily exempt from taxation through 2025.

Final Thoughts – Financial Aid & Taxes

Although many people market financial aid as free money for college, that’s not always the case. If you receive substantial amounts of financial assistance through scholarships and grants, it’s a good idea to speak with a tax specialist. They can help identify which awards, if any, should be claimed as income on your returns. A tax specialist can also help determine your eligibility for certain educational tax credits and the student loan interest deduction, which can help lower your tax bill. To receive a free tax consultation, call Tax Defense Network at 855-476-6920 today!