Signing up for and securing all of your financial aid for school can be confusing and downright stressful. For most students, it is the first major financing event of their lives—and it can feel overwhelming.
Most students have financing coming from multiple sources. There are fellowships and scholarships you may have been awarded, and then there are the federal student loans, from unsubsidized to subsidized loans, to Direct Consolidation Loans and Direct PLUS loans.
Maybe you have private student loans as well. Maybe you have already asked yourself questions like: Will the amount you borrow cover all the tuition, fees, and living expenses you need it to? Have you borrowed too much or too little?
On top of figuring out just how much you need to borrow and learning all the different terms of repayment for each financial aid source, there are the tax implications to consider as well. You might see all that financial aid money disbursed into your account and wonder: Do student loans count as income? Is financial aid taxable? Are scholarships considered income?
In this simple guide, we will walk you through the tax implications of several forms of financial aid: student loans, fellowships, and scholarships. You should definitely consult with a tax professional for the important details, but we’ll cover some of the key tax benefits and drawbacks of financial aid and offer some ways to navigate your student loan repayment as painlessly as possible so you can get back to what’s important: your life!
Are Student Loans Taxable?
There are multiple types of student loans—each with their own unique terms. The good news is that student loans are not taxed as income.
This is true of other types of loans generally as well, like credit card spending, mortgages, and personal loans (unless the loan is forgiven). The IRS considers student loans a form of debt—not income—therefore, it is not taxed.
The only time that student loans (or other types of debt) can be taxed is if they are forgiven during repayment. If you are eligible for a student loan forgiveness program and have met the requirements (which vary, and may include stipulations like making eligible payments for 20 to 25 years via an income-driven repayment plan or completing eligible public service work/payment requirements, and others), the remaining balance on your student loans (the amount forgiven) may be taxed as income, depending on the repayment plan. This could amount to a hefty tax bill.
Are Scholarships Taxable?
The high-level answer to this question is: it depends. There are many different forms of scholarships, grants, and fellowships that are awarded to students to cover the costs of studying and research. Some are need-based and some are merit-based. The basic difference between scholarships and loans is that a scholarship is given while a loan is borrowed. You won’t have to pay back a scholarship, but you do have to pay back a loan.
Most scholarships are not taxed when you are enrolled in a formal educational institution and the scholarship is directly used to cover the costs of tuition, fees, books, and supplies used for study.
There are some situations in which scholarships can be taxed, however. For instance, a scholarship can be taxed as income if you use it to cover what are considered “incidental” expenses related to your education such as travel, room and board, and supplementary equipment and supplies.
Another type of scholarship that can be taxed is a scholarship that has a service-related requirement to it. This frequently applies to scholarships for graduate students. If you are required to teach, provide research assistance, or perform other services as a condition of your scholarship, it can be taxed as income and you will be required to report the scholarship as part of your gross income.
(There are many other ins and outs and types of scholarships are considered income and what scholarship-related activities are taxable—an exhaustive resource to dig into them all is Publication 970 on the IRS website.)
Does Financial Aid Come with Any Tax Benefits?
Student loans aren’t usually taxable as income, and in fact may come with a tax benefit that is meant to make repayment a little easier on borrowers investing in their educations. The Student Loan Interest Deduction allows you to deduct the amount of interest you have paid on your student loans up to a maximum of $2,500 per year, depending on your income (the deduction was phased out at of modified adjusted gross income for the 2017 tax year).
For instance, let’s say you have $30,000 in student loans and have a 7% interest rate on that amount over a standard repayment period of 10 years. On a standard repayment plan, your monthly payment will be about $350. In your first year of repayment, you’ll be paying about $1,200 in interest. In this scenario, you may be eligible to deduct that from your annual gross income, meaning you could pay less in taxes. This deduction can also help defray some of your repayment costs.
How Can I Make My Student Loan Repayment Easier?
The costs of student loans come in the form of the interest you pay each month on what you borrow. The example above, of a $30,000 loan with a 7% interest rate, shows just how much student loan borrowing can cost you per year. Over a standard repayment period (10 years), you would hypothetically pay close to $12,000 in interest in addition to repaying the $30,000 principal.
If you already have private and/or federal student loans,you may be able to refinance your student loans at a lower interest rate than you currently are paying. If you are eligible to refinance your student loans, you could shorten your term length, lower the interest rate on your loans, or lower your monthly payment (by extending your term). But there can be some potential drawbacks to think about.
For instance, federal student loans come with several benefits and protections such as forbearance, deferral, and income-based repayment plans that most private loans do not offer. If you think you might need some of these benefits, or if you are eligible for student loan forgiveness, it might not be the right time to refinance.
However, if you have a steady income and good cash flow—along with other aspects of your financial picture that are appealing to a lender—and you are ready to focus on paying down your loans, refinancing might be the right solution for you.
SoFi is a leader is the student loan space, offering both private student loans to help pay your way through school, or refinancing options to help you save on the loans you already have.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
SoFi private student loans are subject to program terms and restrictions and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. View payment examples. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.