The information in this article is up to date through tax year 2019 (taxes filed in 2020).
What is FAFSA?
The Free Application for Federal Student Aid (FAFSA) is a form completed each year by college students to determine eligibility for student financial aid. The U.S. Department of Education uses the FAFSA to determine students’ Expected Family Contribution (EFC) – a measure of your family’s financial status to figure how much financial assistance you need. If a grant or loan program does not require your FAFSA when applying, it is likely unreliable or a scam.
Do I have to pay taxes on financial aid?
Each source of financial aid affects taxes differently. Below are the tax liabilities associated with each type of financial aid – loans, grants, scholarships, and work-study funds.
Student loans are not considered taxable income. The loan recipient is expected to pay back the lender, so loans are not a source of income.
Grants and scholarships
Grants and scholarships are typically considered “free money” to help pay for education. Certain circumstances may require a portion or the entirety of a grant or scholarship to be repaid (e.g., if you withdraw from school in the middle of an enrollment period). In that case, you would be notified with how much you owe and when it is due.
Grants generally don’t have to be repaid and are needs-based, so they are not considered taxable income. Scholarships are similar in that they don’t have to be repaid, but they are typically merit-based (based on academic excellence, other talents, etc.). The student’s requirements to maintain financial aid should be outlined when the aid is accepted. Most grants and scholarships require students to put the money toward qualified educational expenses, including:
If a student puts awarded money toward unauthorized expenses, it may become taxable.
Work-study programs are part-time jobs on campus offered to students to reduce tuition costs. You must report this income on a federal tax return. If a student makes more than the standard deduction amount for the tax year, they must file their own tax return. For more information, read Can I Claim My Student as a Dependent?
Which tax return do I need for FAFSA?
FAFSA applications for the upcoming school year become available in October of the previous year. For example, the 2019-2020 FAFSA application became available in October 2018. The 2019-2020 application requires your 2017 tax information (return filed in 2018).
For help getting a prior year return, read Find Last Year’s Tax Info on TaxSlayer.