Do student loans count as taxable income?
Taxes, financial aid, grants, and scholarships can be confusing. Read to learn about how these funding sources apply to taxes.
If you're attending college, chances are good you'll receive some financial help paying for school. This could include scholarships, grants, federal student loans, and private student loans.
Collectively, the amount of financial aid you receive could add up to tens of thousands of dollars per year. And that raises an important question: Does financial aid count as income?
The answer to this question could be important for a number of reasons. For example, if you're hoping to apply for a credit card, you may wonder, does financial aid count as income for credit card approval? But for many students, the most important question centers around whether financial aid is taxable or not.
And the answer to the question, does financial aid count as income for taxes, can be a little complicated to answer. Here's what you need to know.
Do student loans count as taxable income?
Student loans are a common source of college funding. And the good news is, this type of financial aid is almost never taxable, regardless of whether you take out federal or private student loans. That's because it is expected that you will repay the borrowed money in the future.
However, if you get your loans forgiven in the future and you pay back less than the full balance, the forgiven amount is generally considered taxable income.
While there are some exceptions to this, such as when you qualify for Public Service Loan Forgiveness or Teacher Loan Forgiveness, most of the time you are taxed on the amount you didn't pay back. That's true even if you received forgiveness after fulfilling the payment requirements on an income-driven plan for federal student loans.
So, while the question, does financial aid count as income, is generally no if the aid you're referring to is student loans, it is possible you could end up paying some taxes on borrowed funds in the future if it turns out the loans don't have to be paid back in full.
Do scholarships, fellowships and grants count as taxable income?
Things get a little more complicated when taking scholarships and grants into account. In fact, the question, does financial aid count as income for taxes, has more than one answer in this case.
That's because scholarships, fellowships, and grants are not taxable only if certain conditions are met. According to the IRS, this money is tax-free if:
- You're working towards a degree at an educational institute with enrolled students; a regular faculty; a curriculum; and ongoing educational activities.
- The money you use goes towards tuition; enrollment and attendance fees; books; supplies; and equipment required to complete your courses.
However, if you use your scholarship, fellowship, or grant money for travel; room and board; or any optional expenses, you must include it as gross income in your taxes.
And if you receive a payment for services, such as teaching or researching, this generally must be included in your gross income as well. However, there are some exceptions such as if you're performing required work for the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
Does work study money count as income for taxes?
If you earn wages as part of a work study program, you are typically required to report this money as income on your federal tax returns. There are a few exceptions for work performed as part of the Armed Forces Health Professions Scholarship and Financial Assistance Program or the National Health Service Corps Scholarship Program.
If you are currently working in a work-study position less than half time and enrolled in college full-time, then your earnings may be exempt from Medicare and Social Security payroll taxes. You will still owe federal and state tax, though.
Does a financial aid refund count as income?
In many cases, schools provide a financial aid refund. This is extra financial aid money that isn't used to cover tuition, but that you are provided at the start of each semester to help fund living expenses.
A financial aid refund can count as taxable depending on the source of the funds and what you are using the money for. If the refund came from borrowed funds or is used to cover qualifying educational expenses (such as tuition and academic fees), then it won't be considered taxable.
But if the refund comes from a scholarship, grant, or fellowship and you use the money for room and board; travel; or other similar expenses, then the money must be reported to the IRS and you will need to include it in your gross income.
Is financial aid taxable? Here's the easiest way to find out
As you can see, there's no one simple answer to the question, does financial aid count as income for taxes. But the good news is, the IRS has made it easy to find out whether your particular student aid should be considered taxable or not.
The agency has an interactive online tool that you can use to determine if you need to include your scholarship, fellowship, or educational grant money as income when you file a tax return. You can answer a few simple questions on the tool and get a definitive answer to the question, is financial aid taxable?
The tool doesn't cover loans, though. That's because, as mentioned above, borrowed money is never taxed. If you need to borrow to help fund the cost of your degree, always make sure to research options since this money will have to be paid back.
Federal student loans are often most affordable and come with generous borrower benefits but private loans can also come with reasonable rates as well. Juno can help students qualify for the most competitive possible rates on private student loans. We group your application with other students and negotiate with lenders on behalf of the group to help you borrow for less.
This article does not give personalized tax or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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