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 out 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. In most cases, FAFSA does not directly affect your tax return. FAFSA itself does not increase or decrease your taxes, but the financial aid you receive through the FAFSA process may affect whether certain education benefits are taxable or qualify for tax credits.
Is FAFSA aid taxable income?
In general, FAFSA aid is not taxable income. FAFSA is simply the application used to determine eligibility for financial aid. Whether the aid you receive is taxable depends on how the funds are used.
Most forms of student aid are tax-free when used for qualified education expenses, such as tuition, required fees, books, supplies, and equipment needed for enrollment. However, any portion of aid used for non-qualified expenses, such as room and board, transportation, or other personal expenses, may be treated as taxable income.
Student loans are generally not taxable because they must be repaid. Likewise, work-study earnings are taxable wages, but they are taxed as earned income rather than as financial aid.
Do I have to report financial aid on my tax return?
You may have to report financial aid depending on the type of aid and how you sepnt it. Each source of financial aid affects your taxes differently. Below are the tax liabilities associated with each type of financial aid – loans, grants, scholarships, and work-study funds.
Student loans
Current student loans are not considered taxable income. Student loans that have been forgiven or cancelled are also tax-free. The loan recipient is expected to pay back the lender, so loans are not a source of income. However, you should report your student loans to determine if you are eligible to claim a tax deduction for the interest you paid on them.
Grants and scholarships
Grants and scholarships are often considered “free money” because they typically don’t need to be repaid. However, that doesn’t automatically mean they’re tax-free.
In general, a grant or scholarship is tax-free only when it’s awarded to an eligible student pursuing a degree and used for qualified education expenses. These expenses typically include:
- Tuition
- Required fees
- Books
- Supplies
- Equipment required for coursework
Grants are usually awarded based on financial need, while scholarships are often awarded based on academic achievement, athletic ability, artistic talent, or other accomplishments. The requirements for maintaining your financial aid should be provided when you accept the award.
If grant or scholarship funds are used for nonqualified expenses, such as room and board, housing, travel, or other personal costs, that portion is generally considered taxable income. Likewise, if your grant or scholarship exceeds your qualified education expenses, the excess amount is generally taxable to the student.
In some situations, a school may require repayment of a grant or scholarship. For example, you may have to return a portion of the funds if you withdraw before completing an enrollment period. If this happens, your school or financial aid office will notify you of any amount owed and provide repayment instructions.
Work-study programs
Work-study programs are part-time, on-campus jobs 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.
Do I have to pay taxes on financial aid refunds?
You may receive a financial aid refund when the amount of financial aid credited to your student account exceeds your school charges. For example, if your grants, scholarships, or student loans exceed your tuition and fees, the school may refund the remaining amount to you.
The tax treatment of a refund depends on how the funds are ultimately used.
- If scholarship or grant funds are used for qualified education expenses, they are generally tax-free.
- If scholarship or grant funds are used for non-qualified expenses, such as housing, meal plans, or personal living costs, that portion may be taxable.
- Refunds from student loan proceeds are generally not taxable because loan funds must be repaid.
As a result, some students may need to report part of a financial aid refund as taxable income, while others may not owe any tax on the refunded amount.
How do I report financial aid on my taxes?
If your financial aid is taxable, you’ll need to report the taxable amount as income on your federal tax return using Form 1098-T.
When preparing your return:
- Gather records showing how scholarships, grants, and other aid were used during the year. Determine whether any portion of the aid was used for non-qualified expenses and is therefore taxable.
- Use Form 1098-T, Tuition Statement, to review education expenses and certain amounts received through your school.
- Report taxable scholarship or grant income on the appropriate section of Form 1040 according to IRS instructions.
Keeping records of tuition payments, scholarships, grants, and education-related expenses ensures you accurately report taxable financial aid and claim any education credits or deductions.
Which tax return do I need for FAFSA?
FAFSA applications for the upcoming school year typically become available in October of the previous year. The FAFSA application was redesigned for the 2024-2025 school year. The current year FAFSA application for 2026-2027 FAFSA opened on September 24, 2026. You will need your 2026 tax information (tax return filed in 2027) to fill it out. If you don’t have your tax return, you might be able to fill it out without it.
