When buried in textbooks and overloaded with a heavy course schedule, the help of financial aid, student loans and/or grants can be a soothing solution to the expensive chaos of college life. Once students graduate, the loans, grants and/or financial aid that they have accumulated can feel overwhelming. Knowing what financial aid is income and what is not taxable income can assist with whittling down balances or choosing another financial aid avenue. If you are confused about what is taxable income from any of the financial aid you receive, it could create more fees, charges or problems with the IRS.
Student loans can be considered income if they exceed how much you reasonably pay in tuition and other course-related fees or purchases. These include books, student parking and special purchases, such as calculators that are needed to complete a course.
Student Grants as Income
The IRS has rules as to what is considered income when it comes to student grants. If you use a grant to pay for IRS-qualified education expenses at an educational institution that is eligible, and you are currently enrolled, then you don’t have to pay any taxes on the funding. The expenses that are valid with the IRS include tuition, some fees and course-related expenses, such as books. It does not apply to rent or any room and board. If the grant you receive exceeds the qualified fees, the money that is left over is considered income. The good news is that you can spend it as you wish, and the bad news is that you have to pay taxes on that money. If you put 25 percent of the excess in a savings account, that should cover the taxes expected to be paid by April 15 of the following year. Filing taxes separately for student loans if you are married can help you reduce the amount of taxes you pay.
Are Student Loans Considered Income?
Are student loans considered income? It depends. Student loans are considered income if they exceed the amount that is needed for your school expenses. They are not taxed by the IRS. It is not considered taxable income because all of the money that you receive must be paid back at some point. This means you don’t include it on your tax return.
However, when you pay back the loan, you can deduct the interest from the student loan on your annual taxes. The good news is that the money you receive from student loans is considered part of your income when applying for bank loans or credit cards. If a student loan is forgiven, check with the IRS or a tax professional to ensure you don’t have to pay taxes on the amount that was forgiven. The IRS will more than likely send a Form 1099-C if it sees that you have a student loan that was forgiven.
Will paying off a student loan increase a credit score? Possibly. It depends on the amount and length of time that you have been paying down the balance. A student's annual income for credit card applications should include the funds from student loans.
Benefits of Student Loans
If you have a large amount of student loans, don’t panic or worry that it will damage your credit or keep you from future financial freedom. Student loans can help to pay for the basics and also boost your credit score if paid on time. Grants, financial aid and loans are good tools that can allow students to better focus on arriving at the end of their college career with stellar grades to boost their chances of getting a lucrative position in the field of their choice. Student loans or other financial aid during college can also give students the opportunity to complete nonpaying or low-paying internships to gain significant experience in their industry or field.
Federal work-study programs are a type of financial aid. They let you earn money to pay for room and board and other expenses. The money you earn is considered taxable. Work-study taxes are due along with your other taxable income by the IRS annual tax deadline.
Benefits of Pell Grants
Pell Grants are free and clear income, unlike a student loan for college. Pell Grants are available to those who can show a financial need. Undergraduates who are currently enrolled or who have accepted enrollment at an eligible college or certificate program, who have a high school diploma or equivalent and who are U.S. citizens or otherwise eligible noncitizens can apply for a Pell Grant. The maximum Pell Grant is nearly $6,000. They are paid to you through the college, which will notify you in writing about how you will receive the funds. Legally, the college must distribute the funds to you at least twice annually.