Financial aid that you receive for college is usually not taxable, but there are exceptions. If you’re a non-degree student, for example, or if you spend financial aid on non-qualified expenses, you might have to pay taxes on it.
Fortunately, student loans are not taxable. Let’s take a closer look at the tax implications for different types of financial aid and loans and other key issues by answering the following questions:
- Is financial aid taxable?
- How do I report my financial aid to the IRS?
- How about student loans — are they taxable income?
- What is the student loan interest deduction?
- When can student debt be taxed as income?
- Plus: Final thoughts on financial aid counts and taxable income
Does financial aid count as taxable income? Generally the answer is no, but this can change depending on the type of aid and other circumstances. We’ll look at student loans later in this report, but first let’s consider the following:
Whether you claim scholarships and grants as income on your taxes depends on how you use the money, explained Josh Zimmelman, owner of Westwood Tax & Consulting LLC in New York.
“Financial aid and grants are generally not considered taxable income, provided the money is spent for tuition, fees, books and other supplies for classes,” he said. “Grants and scholarship money used for other purposes, like room and board, must be reported as taxable income.”
In other words, grants and scholarships awards that are used on qualified education expenses, as defined by the IRS, are not taxable. However, if you use that money on non-qualified expenses, such as room and board, travel or other personal costs, you’re expected to report that money on your taxes.
What’s more, your financial aid awards could be taxable if you’re not pursuing a degree in an eligible educational program. If you spend scholarship or grant money on a non-degreed program, you’ll likely have to pay taxes on it.
Finally, a scholarship or grant award could be taxable if it represents payment for teaching, research or other services.
As a graduate student, you might receive a fellowship to cover your school costs. As long as you’re using that fellowship on qualified education expenses in a degree program, it’s unlikely to be counted as taxable income.
However, if you’re receiving the fellowship in exchange for work, it could be treated as taxable income. Basically, you need to find out whether your fellowship is being treated as a scholarship award or as earned income in exchange for teaching, research or other services.
Your financial aid office should be able to help you decipher the tax rules around your graduate fellowship.
Work-study awards are often available to students with financial need. The work-study program provides part-time jobs to undergraduate and graduate students, often on-campus.
Since students make an income from work-study jobs, they have to report it to the IRS. While work-study is a type of financial aid, it is still money earned. That means it has to be reported to the IRS and is typically taxable.
Many college and graduate students work part-time jobs to cover the cost of school. Unfortunately, there are no special tax breaks for students who work while they study. You’ll still need to pay taxes on your earnings.
If you use your financial aid, specifically your grants, scholarships and federal student loans, on qualified education expenses, you don’t need to report it as income to the IRS. The IRS doesn’t get a 1099 or W-2 for your financial aid money.
However, you should report any money you make from a work-study position. And if you have a taxable portion of financial aid (i.e., money that you used on non-qualified education expenses), you typically report that as part of your adjusted gross income with Form 1040.
It can be tough to figure out if any part of your financial aid needs to be reported, so it’s a good idea to ask your financial aid office. A financial aid officer can sort through your financial aid awards and let you know if any of it fell outside the rules for education expenses and needs to be reported to the IRS. A qualified accountant can also help you sort through these murky waters.
The short answer is no.
“Student loans are not considered taxable income because it is expected that you’ll pay that money back at some point,” said Zimmelman.
When you borrow money to pay for school, you don’t need to report your loans as income on your tax return. It might feel like you should because you’re receiving money, but those funds aren’t truly yours. Loans are borrowed money that you have to pay back with interest.
But rather than counting as income on your taxes, Zimmelman pointed out, student loans can actually provide some tax benefits.
Once you start repaying your student loans, you could receive a tax break because the interest you pay is tax-deductible. The student loan interest deduction allows you to deduct from your taxable income up to $2,500 a year in student loan interest that you paid, potentially lowering your total tax bill.
There are some restrictions, though. You can’t take the deduction if your tax filing status is married filing separately, if someone else claims you as a dependent on their tax return or if your modified adjusted gross income is $85,000 or more (or $170,000 or more if you file taxes jointly with a spouse).
Use our student loan interest deduction calculator to see how much you could save by taking advantage of this deduction.
While in school, you can also claim tax credits for your education using the American Opportunity Tax Credit or the Lifetime Learning Credit. The advantage of tax credits is that they directly lower the amount of taxable income — and thereby the tax you owe.
If you qualify, the American Opportunity Tax Credit can result in a tax credit of up to $2,500 per year for your first four years of college. The Lifetime Learning Credit allows you to claim up to $2,000 per tax return.
While student loans are not considered income when the money is disbursed to you, you may not be completely in the clear.
When your loans are forgiven, you don’t have to pay the debt back. In some cases, the forgiven balance could then be considered money you received as a benefit, making it taxable income. This typically includes any forgiveness you may receive as the result of an income-driven repayment plan.
Under these plans, your monthly loan payments are tied to your income and you repay your debt for 20 or 25 years, depending on the plan you chose. Once that repayment period is complete, any remaining student loan balance is forgiven. At that point, the forgiven amount is considered income, meaning a higher federal income tax bill for you.
Note that taxes on loan forgiveness have been waived until 2025 as part of the March 2021 American Rescue Plan. Thanks to this legislation, you don’t have to worry about paying taxes on your forgiven student loan balance.
You also never have to worry about paying taxes on forgiveness you receive from the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs. If you qualify for these programs and your remaining loan balance is forgiven, you won’t have to pay taxes on the forgiven amount.
Before pursuing a plan that involves student loan forgiveness, consider consulting with a tax professional to determine the impact.
For many people, paying for college without taking on federal aid or student loans is extremely difficult. That means it’s important to understand how your financial aid and student loans impact the rest of your life, including your taxes.
In most cases, your financial aid and student loan debt won’t be taxed as income, and you may even benefit from the student loan interest deduction or another tax credit. But keep in mind the situations when you could face a tax bill for your aid or loans. That way, you can prepare for a potential tax bill long before it’s due.
Rebecca Safier and Sage Singleton Evans contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.88% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|2.25% – 6.59%5||Undergrad & Graduate|
|1.88% – 5.64%6||Undergrad & Graduate|
|1.90% – 5.25%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Interest Rate Disclosure
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.
Auto Pay Discount Disclosure
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Student Loan Refinancing Loan Cost Examples
These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.
One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.
© 2021 Earnest LLC. All rights reserved.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for SoFi.
Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 2.25% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
6 Important Disclosures for Navient.
7 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.