How Do I Report FAFSA® Money on My Tax Return?

Does your FAFSA® money consist of grants, scholarships, and federal student loans? If so, then you probably don’t need to include the money you received from completing your FAFSA® on your tax returns. Whether you have to include your FAFSA® money on your tax returns depends on your status as a student and how you use the money.

Your Pell Grant Can Be Tax-Free

The IRS treats Pell Grants as scholarships, which means that as long as you use the grant for school-related expenses you might not have to pay taxes for it. You have to be a degree-seeking student, and the way you use your money needs to meet certain requirements the IRS has laid out. So, before you spend your Pell Grant on anything, be sure you’ve paid attention to those IRS rules, like:

  • The grant can’t exceed the cost of your education.
  • You must use it at an eligible educational institution.
  • You must use it for degree-related expenses, like tuition or books.

Not All Expenses Are Qualified Education Expenses

The IRS does not consider all expenses you incur for college as qualified educational expenses. One big non-qualifying expense is room and board. If you use your FAFSA® grant money for room and board, then you have to report it on your tax return. The same is true if you incur research expenses, travel expenses, or buy equipment that isn’t expressly necessary for your education.

Student Loans Are Not Income

Your student loans are not income, because you have to pay them back, you don’t report your student loans as income on your tax return. When you start paying those loans back, however, you can report the interest you pay and have it deducted from your income on your tax return. You can only deduct a certain amount each year, but that deduction can help boost your refund.

Check With Your School’s Financial Aid Office

So, if you can only use grant and scholarship money for certain things, how do you know whether you have to report it as income? Ask your school’s financial aid office how they apply your aid to your bills. A lot of schools will automatically apply need-based grants to tuition first. If the school does not automatically apply your aid this way, you can ask the financial aid office to apply your grants and scholarships to tuition, to ensure it fits within the IRS rules about education expenses.

Before you seek any outside help, your school’s financial aid office is a resource for information about your college money. A qualified accountant can also help you sort out your grant and loan information if you’re confused. How you use grants and scholarships is essential in whether or not that money is tax-free.

Use the information mentioned below to determine what should and should not be included in your tax returns depending on the kind of financial aid award you received:

  • Exclude your Pell Grant from taxable income: You will only include your pell grant in your tax returns if you use the funds for unapproved purposes. If you use the funds to pay for your room and board and/or school-related travel expense you must then include the portion of the grant you use to pay these expenses in your taxable income.
  • Include your earnings from a work-study award on your tax return: Many students are eligible for work-study depending on their family’s income. The money earned from work-study is taxable and therefore should be included in your tax returns. When you prepare your tax return, you must include your work-study wages and salary.
  • Exclude from taxable income any government student loans: You don’t need to include your federal student loans in your tax returns. However, when you begin repaying your loans, you may qualify for a student loan interest deduction if you are a low-income student and you use the funds only for school-related expenses while in college.
  • Evaluate any state financial awards you receive: State awards have the same requirements as federal grants. Therefore, you shouldn’t include state awards in your tax returns.

If you get more money than you need for college, the remaining amount may be taxable. On the other hand, if you use the funds from the grants, scholarships, and federal loans you received for qualified college expenses you don’t need to include them in your tax returns.

Keep in mind, that the tax treatment of your FAFSA® award is the same even if you withdraw from the college at a later date if you initially used the funds to pay college expenses.