Reporting student income on your tax return can be tricky. The Free Application for Federal Student Aid, or FAFSA, is used to award federal financial aid such as grants and loans. Much of this money is considered tax-free. However, in some cases you may have to claim some or all of the money you received as income on your taxes. It could even benefit some students to do so.
Tax-Free Federal Student Aid
The Internal Revenue Service provides guidance for the tax treatment of federal student aid and scholarships. The most common federal student grant, the Pell grant, is a need-based grant that is treated as any other scholarship. Student aid that is used to pay for qualified education expenses, as determined by the IRS, is tax-free as long as you are a degree-seeking student at an eligible school. Qualified education expenses include required tuition and fees and required course-related expenses. Any student aid that exceeds these expenses is taxable, even if the money is federal need-based aid. If your only income is tax-free scholarships, you don't need to file your taxes.
Taxable Federal Student Aid
Student aid that is used to pay for expenses that do not qualify for tax-free treatment should be reported to the IRS as income. Students incur many related expenses that are not considered qualified education expenses by the IRS. For example, the cost of your room and board, travel, research or optional supplies and equipment do not qualify for exclusion. If you use money you receive from the FAFSA to cover these expenses, it should be reported.
Your school may have a policy on how it applies your student aid to your account. For example, you may receive scholarships, a federal need-based grant and federal student loans. Student loans are not taxed and are not income. It can be confusing determining which money is used to pay which school expenses. Your school may determine that federal need-based grants are applied to your tuition first, followed by scholarship money and then loans. If you aren't sure which expenses your grants and scholarships paid for, you can ask your school's financial aid office.
Check with an accountant or tax preparer to see how differences in filing can affect other tax issues, such as education credits. The American Opportunity Credit is partially refundable and worth up to $1,000. The Lifetime Learning Credit can reduce your tax obligation. Reporting taxable grants and scholarships to the IRS could make you eligible for one of these tax credits.
- TurboTax: How to Report FAFSA College Money on a Federal Tax Return
- University of Michigan Office of Financial Aid: Frequently Asked Questions
- Internal Revenue Service: Scholarships, Fellowships, Grants, and Tuition Reductions
- Internal Revenue Service: Publication 970 Tax Benefits and Education
- FinAid: Taxability of Scholarships
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