Potential Tax Consequences of Financial Aid

Sep 25, 2015

With the cost of attending college constantly on the rise, financial aid has quickly ascended to the top of the priority list for students and parents alike. Aid in the form of scholarships and grants are among the most favorable types, as they are essentially free money a student or parent is never obligated to pay back. Federal student loans, while not nearly as favorable as scholarships or grants, are another common type of aid most students seek out. While in most instances, whether the aid is received by way of a scholarship or lent to a student through a loan, this money is not taxable. However, there are some situations where these amounts become considered taxable income.

According to the IRS, scholarship, grant, and fellowship monies are tax-free as long as it is solely used to pay for a student’s tuition, fees, books, or other related supplies. You may notice there is one major expense most students face, not included on this list: room and board. This is often a significant portion of a student’s total cost to attend college, but it is not considered an eligible tax-free expense. As a result, any portion of aid coming from a scholarship, grant, or fellowship used to pay for room and board is includable in the taxable income of the recipient.

In addition, if any of the money received from these awards goes towards a student’s personal expenses, like dorm room supplies or transportation, the portion used for these expenses is also taxable to the recipient. An additional exception applies to those students who receive fellowships. Any portion of the fellowship that was intended as payment for research done by the student, or for teaching assistance they provided, is treated as taxable income.

One of the other most common types of financial aid comes in the form of federal student loans. Many students complete college with thousands of dollars in federal student loan debt. One of the ways the government offers assistance to these students is by offering forgiveness on a portion of this debt at the end of certain repayment plans. Typically, the repayment plan requires a student to make full and timely payments on their loans each month for a certain number of years, like 20 or 25, then at the end of this term, if there is still a portion of the debt remaining, the federal government will offer to forgive this remaining balance. While this comes as a huge relief to those students, it is important to remember that in most cases the amount the government forgives is usually considered taxable income to the student.

Receiving financial aid for college is a major relief for both parents and students, but it is also important to keep in mind the tax consequences that may come with it. Feel free to contact your WVCO tax advisor with any questions. By: Ruben Becerra, Staff Accountant

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