Do you need to pay taxes on financial aid? How will home equity or capital gains affect financial aid? And what does financial aid cover? This guide answers your financial aid questions, particularly those related to financial aid and taxes.
Understanding financial aid can pose a challenge, especially for students receiving many forms of financial aid. Before applying for scholarships or submitting the FAFSA, students should understand how financial aid works and which rules apply to their situation. This guide answers common financial aid questions. For more information, students can consult a tax professional or their school's financial aid office.
Financial Aid and Taxes
Students and families may struggle to find simple answers to questions about financial aid and taxes. Everyone must report their income to the IRS. However, students often wonder whether financial aid counts as income.
According to the IRS, scholarships and grants do not typically count as taxable income. Neither do student loans. But that rule covers scholarships and grants applied to tuition and educational expenses. Students may need to pay taxes on scholarships and grants they use to cover living expenses.
Enrollment status also impacts tax rules. Students must enroll in a degree-granting program to avoid paying taxes on most forms of financial aid. A tax advisor or CPA can provide more detailed information about your situation.
Most forms of financial aid are not taxable. For example, students typically do not pay taxes on student loans, grants, or scholarships. There are exceptions, however. Students must pay taxes on work-related income distributed as financial aid. Work-study earnings, for instance, qualify as taxable income.
The IRS offers resources on financial aid and taxes. Students can also direct tax and financial aid questions to their school's financial aid office.
What Does Financial Aid Cover?
The cost of attendance (COA) varies by school and impacts financial aid eligibility. The COA includes tuition, living expenses, textbooks, and fees. Schools calculate aid based on the difference between the student's COA and expected family contribution.
Financial aid does cover out-of-state tuition costs. Public colleges and universities receive funding from the state government. In exchange, they offer a tuition discount for residents. That means out-of-state learners generally pay higher tuition rates.
However, some colleges offer scholarships for out-of-state students, which may lower costs to in-state rates. Degree-seekers in some states may qualify for tuition-exchange programs. Finally, some colleges charge all online learners the same tuition rates, regardless of residency.
Frequently Asked Financial Aid Questions
Your school's financial aid office will distribute your financial aid. Depending on the type of aid, the school may apply funds directly to your tuition or room and board. Students may also receive a deposit. The timing of the disbursements depends on the school and the type of aid. Contact your school with specific financial aid questions.
Genevieve Carlton
Genevieve Carlton holds a Ph.D. in history from Northwestern University and earned tenure as a history professor at the University of Louisville. An award-winning historian and writer, Genevieve has published multiple scholarly articles and a book with the University of Chicago Press. She currently works as a freelance writer and consultant.
