Taxes and College Financial Aid

Following is an overview of the general rules regarding taxability of college financial aid.

* Scholarships, fellowships, and grants - These are not taxable to degree candidates to the extent that they are used to pay for qualified tuition and related course expenses. Payment for room, board, and incidental expenses are taxable, as are payments to non-degree candidates. Note that parents who furnish more than one-half of a student’s total support may be entitled to a dependency exemption on their income tax return. The amounts received in the form of a scholarship are not considered part of total support.

* Payment for services - Work-study arrangements often help pay for college. Generally, all payments for services are taxable as wages to the student who earns them, though some payments may not be subject to social security and Medicare taxes.

* Tuition reductions - Typically, this is a benefit for college employees, their spouses, and dependent children. Generally, a tuition reduction benefit is nontaxable if it is restricted to undergraduates, does not discriminate in favor of highly compensated employees, and is not a payment for services.

* Student loans - Proceeds from student loans are not taxable. When the loan is repaid, some or all of the interest paid may be tax deductible (subject to income limitations).

The income tax laws regarding college financial aid are complex. For details about the rules that apply to your particular circumstances, please give us a call.

See also:
        College Savings - Section 529 Plans Overview
        Prepaid Tuition Plans - Advantages & Disadvantages

© Copyright 2000 Raymond S. Kulzick. All rights reserved. 001007.