Some portions of your FAFSA®, such as work-study programs, might be taxable and some are not, such as student loans. It all depends on how the money was used and if it is part of a work-study program. Tax law is notoriously tangled, but the following guidelines can help.
The good news is student loans are not taxable. A loan is a debt and since you have to pay the money back, they are not considered income and aren’t required to be listed on your tax return. The even better news is you may be able to take a tax credit on the interest on your student loans once you start paying them back.
This goes for both federal and private student loans, either way, a loan is not taxable income and is eligible for tax credits.
Scholarships, Grants, and Fellowships
If you have received a scholarship or Pell Grant and used it only for educational expenses then it is not taxable. Most FAFSA awards are paid directly to the school and are applied to things like tuition, books, and lab fees. If you received a separate scholarship that can be spent on anything, and you spend it out clubbing with your friends, that money becomes taxable.
A great way to figure out if you need to report this money on your tax return and pay taxes on it is to take this 15 minute IRS quiz. This will give you all the answers you need about your situation and help you figure out what qualifies.
Work is work, be it a work-study program or a part-time job at your local coffee shop, all of the money you earned working is taxable. Even if it is listed on your FAFSA® award letter, a work-study program is a part-time job, and you will need to claim this as income on your tax return.
We know you worked hard for the money and have been spending wisely, but Uncle Sam still needs to know how much you made so he can determine how much you owe.
Filing taxes is confusing and absolutely no fun but it is part of growing up. Student loans and many grants or scholarships are not taxable, work-study programs, on the other hand, are. If you still have questions, seeking out an accountant to help keep you straight.