Many students and families rely on financial aid to help cover the cost of higher education. But when tax season comes around, a common question arises: is college financial aid taxable?
When is College Financial Aid Taxable?
College is very expensive. Fortunately though, many students at different schools receive some form of financial aid. So, if your child is one of the lucky ones who gets financial aid, what are the tax implications?
Not all college financial aid is taxable and it depends on how the money is used. Here’s what you need to know.
1. Scholarships and Grants
Generally, scholarships and grants are not taxable if they are used for qualified education expenses such as tuition, fees, and required course materials. However, any portion of scholarships or grants used for non-qualified expenses is taxable and must be reported as income on your tax return. For example, room, board, travel, or optional equipment.
2. Work-Study Programs
Unlike scholarships, income earned through work-study programs is considered taxable income. Students must report this income and may receive a W-2 form detailing their earnings.
3. Student Loans
Student loan funds are not considered taxable income because they must be repaid. Similarly, loan forgiveness or cancellation may have separate tax implications depending on the program.
Reporting Requirements
If part of your financial aid is taxable, you must include it in your gross income when filing your taxes. Many colleges provide Form 1098-T, which helps you determine the amount of qualified versus non-qualified expenses.
Bottom Line
Not all college financial aid is taxable. Generally, aid used for qualified education expenses is not taxed. But aid used for other costs (or earned through work-study) typically is. When in doubt, consult IRS Publication 970. You can also consult with the tax professionals at The Ray Group to ensure you handle your college financial aid taxable situation correctly.
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