Do College Students Have to Pay Taxes on FAFSA Grants?

Looking for ways to dodge that massive college bill? You're not alone. Ever asked yourself, “Are FAFSA grants taxable?” To put it simply, FAFSA grants are not considered taxable income, but the full answer is more complicated. As you walk through this post, you'll unlock the mysteries around FAFSA and the tax liabilities linked with different types of financial aid.

Key takeaways

• FAFSA grants are typically non-taxable as they don't have to be repaid
• Grants become taxable if spent on non-qualified, non-educational expenses, or exceed your tuition amount
• While student loans and work-study income also impact your taxes, they're handled differently

Are FAFSA grants taxable?

First things first - there’s really no such thing as a “FAFSA grant.” The phrase is just a shorthand way to refer to the education grants distributed by the Federal government, which you’ll need to complete the FAFSA to be eligible for.

You’ll be relieved to know that Federal grants are not taxable. Since these grants are needs-based and typically don't require repayment, the IRS considers them non-taxable income.

What is FAFSA, and how does it impact taxes?

The Free Application for Federal Student Aid (FAFSA) is a yearly form college students complete to determine eligibility for financial aid. The U.S. Department of Education uses FAFSA to figure out your Expected Family Contribution (EFC), essentially an estimate of how much you can afford to pay, and therefore, how much monetary help you need. Most need-based grant or loan programs will require a copy of your FAFSA.

How different types of financial aid affect taxes

Now that we've got the FAFSA basics down, it's time to dive into different forms of financial aid and how they affect your taxes. Here's a quick breakdown:

1. Student loans: As these need to be repaid to the lender, student loans aren't considered a source of income, and therefore aren't taxable. Not only that, but you may even be able to claim interest as a deduction against your income to reduce your tax bill.
2. Grants and scholarships: Also known as the "free money" of education, grants, and scholarships don’t require repayment. As long as the funds are used on qualified education expenses, they’re typically not included as taxable income. But if you spend these funds on unauthorized expenses, be ready to face some tax consequences.
3. Work-study programs: These are part-time, on-campus jobs offered to students to reduce tuition costs, and yes, this income is taxable and should be reported on a federal tax return.

Deep dive into grants and scholarships

Both grants and scholarships are typically non-taxable as long as they’re used for education expenses. Grants are typically needs-based, while scholarships are usually merit-based.

Here are some common expenses:

• Tuition
• Books
• Fees
• Supplies
• Equipment

TuitionHero Tip

Remember, using these funds for expenses not listed above could make them taxable.

What about student work-study programs?

If you're part of a work-study program, it's important to remember that this income is taxable. If you earn more than the standard deduction for the tax year, you'll need to file a tax return. So, don't overlook this in your tax planning.

Which tax return do you need for FAFSA?

Filing your FAFSA application requires you to be an early bird. Applications for the coming school year typically open in October of the previous year, but not always.

For instance, the application for the 2024-2025 school year will be available in December 2023, and it will require your 2022 tax information. By planning ahead, you can ensure a smoother application process and better financial aid chances.

Remember, at TuitionHero, we’re here to help you. With careful planning and understanding of how your financial aid can affect your taxes, you can keep the focus on your education – where it belongs!

Compare private student loans now

TuitionHero simplifies your student loan decision, with multiple top loans side-by-side.

[@portabletext/react] Unknown block type "component", specify a component for it in the `components.types` prop

[@portabletext/react] Unknown block type "component", specify a component for it in the `components.types` prop

Compare Rates

Dos and don'ts of FAFSA grants

Though navigating the FAFSA landscape can be a bit of a challenge, some do’s and don'ts can keep you on the right path and help you make the most of your financial aid. Here's a table summarizing the key points:

Advantages and disadvantages of FAFSA grants

Grants can prove to be a lifesaver for many students. However, like any financial tool, they come with both upsides and downsides.

Advantages of FAFSA grants

• They don't need to be repaid, easing the financial strain on students.
• They’re not usually taxable unless they're misused.
• They provide a lot of financial aid, particularly for people who show significant financial need.

Disadvantages of FAFSA grants

• Misuse of funds, such as spending on non-educational expenses, can make them taxable.
• Navigating through the application process may be complex for some people.
• Not all students will qualify for the grants, limiting their overall reach.

Why trust TuitionHero

At TuitionHero, we believe education should be accessible to everyone. We offer Private Student Loans, Student Loan Refinancing, Scholarships, FAFSA Assistance, and Credit Card Offers. Our comprehensive FAFSA guide helps you understand college finance, FAFSA grants, and their tax implications. We provide the knowledge and tools you need to navigate financial aid confidently.

Frequently asked questions (FAQ)

What happens if I accidentally spend my FAFSA grant on non-qualified expenses?

If you accidentally spend your FAFSA grant on non-qualified expenses, it might be counted as taxable income. It's important to keep a record of where your grant money is going or consult a financial advisor or TuitionHero to avoid mistakes like these.

Can I appeal for more financial aid if my FAFSA grant isn't enough?

Yes, you can. If you find your FAFSA grant isn’t enough, you can submit a financial aid appeal letter to your school's financial aid office explaining why you need more help.

Are there penalties for inaccurate information on the FAFSA application?

Intentionally providing false information on your FAFSA application can lead to heavy penalties, including fines and jail time. Always make sure the information on your FAFSA application is accurate to avoid any legal implications.

Final thoughts

Figuring out how FAFSA grants and taxes work can feel a bit challenging. But here at TuitionHero, we're here to make things clear.

We want to help students and parents as they go through the twists and turns of their college finance journey. Navigate the world of finance with a clear understanding of the benefits of financial aid, how taxes come into play, and, most importantly, the peace of mind that you're making the most of your opportunities.

Source

• Federal grants are money to help pay for college or career school.
• Topic No. 421, Scholarships, Fellowship Grants, and Other Grants | Internal Revenue Service
• Free Application for Federal Student Aid (FAFSA) | USAGov