Applying for financial aid can oftentimes seem like a daunting and complicated task, especially when filling out the Free Application for Federal Student Aid. The FAFSA is the cornerstone of most financial aid programs. Without properly understanding this document and how it relates to overall income, thousands of dollars of grants and scholarship may be overlooked.
Non-taxable Requirements
In order for the scholarship proceeds to be considered non-taxable, they must meet certain eligibility requirements to be considered a qualified expense. First and foremost, the student must be in a degree program and attend an accredited educational institute. Expenses must be used to cover tuition, fees and books in order to be considered qualified. Room and board, travel expenses, research and clerical assistance are not considered qualifying expenses.
Calculating the Taxable Portion
To determine the taxable portion of the scholarship, first calculate the entire amount received from all scholarships, grants and fellowships. Subtract the amount that the scholarship requires to be used on non-qualifying expenses. Then subtract the amount spent on qualified expenses. The remainder is the taxable amount of the scholarship proceeds.
Pell and Fullbright Grants
Both Fullbright and Pell grants are treated as scholarships and therefore must meet the qualifications to be considered non-taxable. This principle holds true for all other grants, regardless of need.
Service Academies
Payment received as a cadet at any of the nation's service academies is not considered a fellowship or a scholarship. This is considered income for personal services and is reportable income.
Veterans Benefits
Educational and training payments received through the Department of Veteran Affairs are not considered taxable income and should not be included in annual tax returns. That being said, these benefits may reduce the payments received through other need-based programs.
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