If you're a college student, you're probably (justifiably) preoccupied with midterms and spring break plans right about now. But it also happens to be tax season, and you don't want to leave your filing to the hour before you jet off to Mexico for the week. Especially if you're receiving financial aid — including grants, loans, and scholarships — now's the time to plan ahead. Depending on what types of aid you receive and how you spend it, you do claim financial aid on taxes.
Bear in mind, for tax purposes, financial aid isn't the same thing as your tuition expenses, although one is often used to pay for the other. In addition to your aid package, there are a few different ways you can write off your college tuition on your taxes — more on that below.
Before we dive in, a quick vocab check. You'll probably see the term "qualified educational expenses" get tossed around a lot. In general terms, these expenses, as defined by the Internal Revenue Service, include tuition and fees, books, equipment, and other required supplies for a course. Eligible expenses do not include extra expenses like room and board, health fees, non-credit courses, and transportation.
As for the types of funding you may be receiving, there are a few main differences to note. Student loans, whether subsidized or unsubsidized, aren't just free money, and you'll be expected to pay that back down the line (more on that later). Grants and scholarships, generally speaking, are essentially free money, given for things like athletic and academic ability, talents in the arts, civic involvement and leadership, and specific projects to pursue using that money. Finally, there's work-study, which is a program that some schools offer to exchange on-campus work for tuition deductions. Most award packages include a more than one of these forms of financial aid, so it's important to distinguish how much you're receiving from each.
Most grants and scholarships aren't considered taxable income so long as you're a degree-seeking student at an eligible institution and if you used the funds for qualifying expenses. They may, however, be subject to taxation if you use them to pay for something like food or rent. In general, any amount used to pay for school expenses isn't taxed as income, but if there's a portion of your award that you used for non-qualifying expenses, you need to include that amount in your income. For example: If you put $1,000 of a $4,000 award towards groceries and the rest towards tuition, you'd have to list that $1,000 as income.
Student loans also aren't included in your taxable income. You have to pay that money back with interest, so even though it's helping you finance your education now, you shouldn't be counting it towards your income. (Side note: As an added perk, once you start paying back your loans, assuming you used the money for qualifying expenses, you can apply your payments towards a deduction, which can seriously reduce the amount of tax you owe.)
Finally, work-study earnings do count towards your taxable income, so be sure to include them.
One more quick note on all this free money: If the amount of student aid you receive ends up being more than your actual educational expenses, that extra amount is subject to tax. For example, if you receive $28,000 in federal aid, but then only end up spending $26,000 on education costs, the $2,000 left over is taxable.
The upside to a costly education is that there are a couple of ways you can get added benefits on taxes via your tuition. First, there are two main credits you might be eligible for: the American Opportunity Tax Credit and the Lifetime Learning Credit. Deductions for tuition and other expenses can also add up to a lot of savings, but you can't double dip on these, so choose wisely. On that note, there are some situations in which it's actually more beneficial for you to claim your grants or scholarships as income, using them for personal rather than educational expenses. So consult with a calculator (or an accountant) before inking in your taxes.