To Claim or not to Claim: College Loans and Taxes | 02.11.11

Posted in Financial Aid, financial aid tips, Scholarships, Student Loans By Student Loan Network Staff

Student Loan Taxes Can be ConfusingIt’s tax season again and one of the most common questions from students right now is whether or not they have to claim their financial aid (grants, loans, or scholarships) on their taxes. So to clarify, students have to claim on their IRS tax forms any money gained from services for which they received payment, investments, and self-employment income. Generally, amounts spent on education, scholarships, grants, and loans are non-taxable, though there are some exceptions. To note, most tax-free treatment of income, credits, and deductions require the student to be a degree candidate, but not all.

Before getting to what you do and do not need to claim, let’s look at a term you will be seeing a lot and what it means. In order to be tax-free, student aid must be used for Qualified Education Expenses. What constitutes a QEE? This is any money used for tuition, fees, books, supplies, and equipment required for courses. Unfortunately, room and board does not count, so do not include it in your calculations! You can often include a computer, providing it is a requirement of a class or the university.

Types of Student Aid

There are four major sources of financial aid for students- loans, grants, fellowships and scholarships. While all similar, they might differ in terms and conditions which means you may not need to claim one, though you might have to claim another. The following is a list of “income” sources and how to claim them on your taxes.

  • Student Loans: Student loans are not considered taxable income because you are required to pay the money back. However, if the remainder of a student loan is forgiven or canceled, that amount is subject to taxes, though there are exceptions to this as well. There are also deductions for the interest paid on loans, but more on this later.
  • Grants, Scholarships and Fellowships: These are generally tax-free providing they are used on qualified education expenses. However, if you do not use the full allotment towards these items, the leftover funds ARE considered taxable income and you need to claim them. Any of this money spent on room and board is considered taxable income and cannot be excluded. Should you win a scholarship contest, the entire amount is taxable if it is not specifically designated for educational costs. However, if you win money that must go towards education (like those provided by ScholarhipPoints.com), then the amount is not taxable. There is no need for reporting if your grant or scholarship meets these requirements and is non-taxable.
  • Fulbright grants: Fulbright grants are treated like scholarships and do not need to be claimed unless you are receiving money for teaching or lecturing, at which point it is considered income for services and is subject to tax.
  • Refund Checks: Tuition refund checks can be taxable if they include money from scholarships and some grants. Loan refunds are non taxable as the money does need to be repaid.

For students, knowing when to claim financial aid on your taxes can be tricky. If you are unsure of any financial information regarding your education, make sure to consult your 1098-T form. Your school will mail this to you sometime in February, and it includes important financial information including amounts paid for tuition, scholarships, and grants.

So now that you know a little more about what types of student aid you need to claim on your taxes, read part two of this article: Tax Deductions and Credits for Education


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15 Responses to “To Claim or not to Claim: College Loans and Taxes”

  1. Christy says on February 9, 2013 at 12:32 am:

    So Can I clam stafford student loans As your academics payment for your income taxes in Texas? …

    Reply To This Comment
  2. Vagner Neves says on February 5, 2013 at 8:57 pm:

    is The College Network ok to be claim in my 2012 tax, even i don’t have 1098-T?
    Thanks!!

    Reply To This Comment
  3. Jean says on April 16, 2012 at 10:58 am:

    I don’t know how to file my 1098-T on my fed taxes. Do they count as a credit or a debit!

    Reply To This Comment
  4. Sean says on August 26, 2011 at 5:45 pm:

    I am a little confused if you could please clarify… Student loans are debt which you are required to pay back (even including refund check money). I believe this is not reportable income. While I do understand that if I use student refund check money to pay for apartment rent or other non-QEE I cannot take an education deduction; but, I don’t see how this money would be taxable income.

    Reply To This Comment
    • Amanda says on September 29, 2011 at 11:30 pm:

      Sean, I think what it is saying is that student loans (even the amount refunded) are not taxable. They’re not income because you’re paying them back. I believe the part about refund checks being taxable applies to grants and perhaps any scholarship funds that are distributed directly to the student. Hopefully the author will clarify, as I definitely need to know the answer to this too. I received a refund, but it was only a refund for loan money, not grant money.

      Reply To This Comment
      • Student Loan Guru says on September 30, 2011 at 10:00 am:

        Amanda, you are correct and I apologize for the confusion. Student loans are never taxable, the refund check section applies to certain scholarships and grants. Hope this clarifies!

  5. Grace says on March 30, 2011 at 7:10 pm:

    i hope that i can get enough college money too, so i can help my parents not stress out about me.

    Reply To This Comment
  6. Katie says on March 28, 2011 at 10:00 pm:

    Helpful info on different Financial Aid.. good to know

    Reply To This Comment
  7. Magan says on March 6, 2011 at 4:39 pm:

    I am using H&R Block online and it is telling me that I have to claim any student loan money used for living expenses as taxable income. Is that right?

    Reply To This Comment
    • Student Loan Guru says on March 7, 2011 at 10:02 am:

      @Magan: Technically, yes, student loan money not used for your academics and books is taxable. In order to be tax-free, student aid must be used for Qualified Education Expenses. This is any money used for tuition, fees, books, supplies, and equipment required for courses. Unfortunately, room and board does not count, nor does your rent (living expenses). While your rent isn’t tax free, your computer or laptop should be.

      Reply To This Comment
      • Heidi says on April 17, 2012 at 2:56 pm:

        Ok, confused on your September 30, 2011 posting you say student loans are never taxable, but on March 7, 2011 you say student loan money not used for your academics and books is taxable. So is it taxable if I use my stafford student loans to pay for living expenses while going to college?

  8. Karen Gonzalez says on February 27, 2011 at 2:06 am:

    My son is 22, full time college student. My husband had to co sign for his student loans. Can we claim him as a dependent still? He lives in an apartment off campus. Part of the student loan covers his living expenses. we pay the other 50% of living expenses. We did not pay any interest on the loans in 2010 Please help.

    thank you

    Reply To This Comment
    • Student Loan Guru says on March 3, 2011 at 10:53 am:

      @Karen – Hi Karen – I assume you are talking about filing your TAXES with your son as a dependent. I am not a tax specialist but from what I know, yes, your son still qualifies as a dependent for the purpose of your taxes if you are supporting him that much. Just make sure he does not file as independent. Also, a note to everyone, your tax dependency status and FAFSA dependency status are NOT the same, so follow the worksheets on both of these forms to determine your eligibility.

      Reply To This Comment
      • laura says on April 17, 2011 at 11:35 pm:

        no! students loans must be repaid and do not count as income!

  9. warcraft says on February 16, 2011 at 1:54 pm:

    Amazingly insightful article. If only it was as easy to implement some of the solutions as it was to read and nod my head at each of your points :P

    Reply To This Comment

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