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Does Financial Aid Count as Income?

To help cover the cost of college, many students receive financial aid in the form of loans, grants, scholarships, and work-study positions. If you’re one of these students, you may be wondering if your financial aid counts as taxable income. Fortunately, the answer is no in most cases. However, there are certain instances when financial aid can be taxed. Here’s everything you need to know about financial aid and your taxes. 

Related: What 529 plan assets do I have to report on the FAFSA?

Are student loans taxable income?

The short answer is no. Student loans are not considered taxable income because it’s expected that you’ll pay the money back later on. So if you’re currently receiving student loans, don’t worry about having to report them as income to the IRS. However, things change a bit if your loans are forgiven. 

Learn more: Navigating different types of student loans

What if my loans are forgiven?

If you qualify for loan forgiveness at some point (meaning you don’t have to pay the debt back), the forgiven balance is then considered taxable income in most cases. That’s because your forgiven loans are now considered money you received as a benefit. This also includes any forgiveness you receive that results from an income-driven repayment plan

Exceptions to this rule are loans forgiven under the Teacher Loan Forgiveness program and Public Service Loan Forgiveness program. Neither of these programs will result in you having to pay taxes on the forgiven amount. For the most part, though, you must report canceled debt to the IRS on your tax returns. Loan forgiveness is definitely an attractive way to eliminate your student debt, but just be aware of the tax impacts. 

Is student loan interest tax-deductible?

If you’re currently paying off your student loan debt, the good news is that the interest you pay on student loans is tax-deductible. This means you can deduct from your taxable income a maximum of $2,500 a year in student loan interest that you paid. As a result, you could potentially lower your tax bill. However, some restrictions apply. You can’t use the deduction if:

  • Your tax filing status is married filing separately
  • Someone else claims you as a dependent on their tax return
  • Your modified adjusted gross income is $80,000 or more

Although this may not be on your radar right now, it’s something to keep in mind when you start repaying your student loans. You should receive a form 1098e to use when completing your taxes that includes the total amount of interest you paid for that tax year. 

Are scholarships and grants taxable income?

That depends on how you use your scholarships and grants. If the money is used for qualifying expenses, then scholarships and grants are not considered taxable income. The following items are qualifying expenses:

  • Tuition 
  • Fees
  • Book and other class supplies

Scholarships and grants are not taxable if they’re used for any of the above items. However, they are considered taxable income if used for other purposes like room and board. In some cases, scholarships used for school-related travel expenses may be considered taxable as well. 

See also: Are scholarships taxable?

Is work-study taxable income?

Although work-study is a form of financial aid, it is taxable income because it’s money that is earned. This means you should include income from work-study on your tax returns. Fortunately, you’re exempt from FICA taxes (social security and Medicare taxes) if you’re enrolled in 6 or more credit hours or are working on campus. However, you’re still subject to paying federal and state income tax on your work study earnings. Certain work-study positions are completely tax-exempt, including those sponsored by the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship Program.

See also: Are work study earnings taxed?

How do I report financial aid on my tax returns? 

It is your responsibility to correctly report the taxable portion of your financial aid to the IRS when filing your tax returns. This process can be a little tricky, but you should be in good shape if you follow these steps: 

1. Exclude scholarships and grants used for qualifying expenses

Scholarships and grants used for tuition, fees, books, and other supplies do not have to be reported on your tax returns. This is fortunate because most scholarship and grant funds are primarily used for these qualifying expenses. 

2. Include scholarships and grants used for non-qualifying expenses

Scholarships and grants used to pay for room and board or even school-related travel expenses must be reported on your tax returns. Calculate the portion of your funds used for these non-qualifying expenses and include that amount when filing your taxes. 

3. Include work-study earnings

When filing taxes, you must include earnings from work-study jobs. The amount you earned is listed on your W-2 form, which is provided to you by your employer. You don’t have to report income if your work-study program is sponsored by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship Program. 

4. Exclude student loans 

Student loans are not considered taxable income, meaning you don’t have to list them on your tax returns. However, you may end up having to pay taxes if your loans are forgiven at some point.