College Financial Aid
College in the United States is expensive. In the 21st century alone the cost has doubled and only continues to rise (6.8% in 2021). The average cost is 35,331 per year and for most Americans, this is impossible to pay without financial aid. So, let’s say you are in college, have a student loan, a few grants, and scholarships, and a work-study job through your college. These all affect your tax return and future financial liabilities, especially with student loans. Then it’s time to complete your tax return, you may find yourself asking what payments are considered income, what can be deducted, and how can I make sure I’m planning my taxes to minimize financial responsibilities in the future.
Grants and Scholarships
First, let’s look at the effects scholarships and grants have on your tax liability. Financial aid in the form of grants and scholarships doesn’t need to be repaid. Generally, this money is tax-free but if you receive grants and scholarships in excess of your cost of tuition and fees, that money is taxable income. Even if this money is spent on room and board it is still taxable income and it should be reported on your 1040 return.
Thus, allocating your grants or scholarships to the right expenses is important. Also, scholarships and grants may lower your education credit eligibility or even make you completely ineligible to claim any of the educational credits. The credits are calculated based on your income and accrued tuition and fee expenses. So, if the scholarships and grants cover the majority of this cost or you are in a high tax bracket, don’t expect to receive any educational credits.
Unlike a grant or scholarship, a loan is borrowed money that needs to be repaid in the future. Fortunately, student loans aren’t considered taxable income so you don’t need to include them on your tax return. In addition, you may revive educational tax credits for tuition paid regardless if it is loaned money or your own. Also, you will likely receive tax deductions on your loan interest payments. Similar to educational credits, your income affects the percentage of these payments you are allowed to deduct.
Especially with student loans, the decisions you make now will affect your future interest payments, loan repayments, and tax liabilities. Make sure you understand everything about a loan before you sign it. Also, consult a professional to make sure you are making the best decision for your future.