When Financial Aid is Taxable

The cost of higher education has gone through the roof. Student loans, grants and other forms of financial aid have become the harsh reality for those of us who can no longer afford the high tuition costs at most colleges and universities.

Work-study programs and federal income taxes

Although we don’t think about it as much as we probably should, different forms of financial aid may each present federal income tax issues. For example, many of us must give up the lure of Laguna Beach for part time jobs in the school library or cafeteria as part of a work-study program. Even though the money I earn is used to pay my college expenses, it is taxable income that I must report at the end of the year.

Chances are that, if the only income I have is from my work-study job, I will not earn enough to owe anything to the federal government in the form of income taxes. The fact remains that I must still report the income when I file my personal income tax return for the year.

The good news about student loans 

According to the federal government, outstanding student loan debt is a staggering $1.2 trillion. Obviously, that’s not the good news. Because we have to repay the money we borrow, the money is not taxable, and the government allows us to deduct the interest when we repay the debt. There are rules attached to the deduction, so consulting with a tax adviser is always a good idea.

Keeping grants and scholarships nontaxable

Some of us might be fortunate to receive so-called “gift aid” that is usually free from federal income taxes. Examples of gift aid include:

• Scholarships
• Grants, including Pell grants
• Fellowships

Gift aid gets its name from the fact that, unlike student loans, it does not have to be paid back. Whether I have to report it as income depends on several key factors:

• I am pursuing a degree;
• I use the money to pay school-related expenses such as tuition and books; and,
• My school-related expenses must equal or exceed the gift aid.

Gift aid I receive in August that exceeds my college costs for the upcoming school year must be reported on my 2015 federal income tax return.

Going to college is a big decision and can be costly. If you have questions about your financial aid, call Bart Zandbergen CFP® at (949) 297-8318 or visit his website.