Tax Season Comes with an Expensive Surprise for Some Students and Families | Scholarship America

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Tax Season Comes with an Expensive Surprise for Some Students and Families

Scholarship America Releases Taxability Guide: Scholarship taxation is a burden for students, and an issue made even more urgent by COVID-19

Students who received financial aid this past year may have an unexpected bill to pay—a tax bill. Many students and parents do not realize that they may owe income tax on at least a portion of their scholarship and grant aid. Students who get emergency assistance to help cover their living expenses, in response to the COVID-19 pandemic, will face this same potential taxation in 2021.To help students and parents determine what they may owe, Scholarship America, the nation’s largest scholarship provider, has created a Scholarship Taxability Guide to help scholarship recipients better understand their potential tax liability.

The guide is designed to help students like Ashok Sharma Jr., a communications major at Wichita State University. Sharma is a recipient of a Dream Award from Scholarship America, along with other financial aid. He now wonders how much of that aid he may have to pay in taxes.

“I’m really worried about it,” he said. “I won’t know how much I owe until I file my taxes.” He is trying to save some money from his part-time job, to give himself a cushion. His parents are not in a position to give him much financial help. Sharma isn’t alone. Recently released figures from the Internal Revenue Service* show that in 2017, more than 700,000 students were hit with $2.86 billion dollars in taxes on their financial aid.

Under long-standing federal tax law, scholarships, grants and fellowships covering tuition, fees, books, supplies and equipment, are not taxable. But when student financial aid goes to pay for living expenses, such as room, board, transportation, and child care—substantial expenses for many students—it is considered income and therefore taxable. 

According to Robert C. Ballard, president and CEO of Scholarship America, taxing scholarships is simply unfair and counterproductive.

“We have called on Congress to stop taxing student financial aid,” said Ballard. “It only adds to the financial burden on students, increases student debt and makes it harder for students and families to cover the rising cost of higher education. We don’t tax other forms of charitable giving. We shouldn’t be taxing this.”

Ballard notes that taxing scholarships also discourages scholarship providers who do not want to see their contributions create a tax liability for students. In many cases, providers can incur tax penalties for providing assistance toward these types of college expenses. For today’s students, living expenses make up more than half of the cost of attending college.

“We don’t want students and families to be surprised by this expense, but we would prefer that the tax be eliminated. After completing their taxes, we recommend that students and parents send a message to their representatives to help them understand the impact and encourage Congress to change the law.”

As always, when preparing tax returns, scholarship recipients should seek the advice of a tax preparation professional.

Download Scholarship America’s Scholarship Tax Tool as an Excel Document or view a preview below to see what taxes might look like:

About Scholarship America

Scholarship America is a non-profit organization that helps students fulfill their college dreams. Scholarship America is the largest private scholarship provider in the U.S. and has distributed nearly $4.3 billion to more than 2.6 million students. The organization works with partners to lower barriers to a college education and give students the support needed to succeed. Learn more at scholarshipamerica.org.

*IRS Publication 4801 pp 14-15