Do I Have To Pay Taxes On My Financial Aid?

Updated August 30, 2022

Do I Have To Pay Taxes On My Financial Aid? is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.

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Do you need to pay taxes on financial aid? How will home equity or capital gains affect financial aid? And what does financial aid cover? This guide answers your financial aid questions, particularly those related to financial aid and taxes.

Understanding financial aid can pose a challenge, especially for students receiving many forms of financial aid. Before applying for scholarships or submitting the FAFSA, students should understand how financial aid works and which rules apply to their situation. This guide answers common financial aid questions. For more information, students can consult a tax professional or their school's financial aid office.

Financial Aid and Taxes

Students and families may struggle to find simple answers to questions about financial aid and taxes. Everyone must report their income to the IRS. However, students often wonder whether financial aid counts as income.

According to the IRS, scholarships and grants do not typically count as taxable income. Neither do student loans. But that rule covers scholarships and grants applied to tuition and educational expenses. Students may need to pay taxes on scholarships and grants they use to cover living expenses.

Enrollment status also impacts tax rules. Students must enroll in a degree-granting program to avoid paying taxes on most forms of financial aid. A tax advisor or CPA can provide more detailed information about your situation.

Q. Is Financial Aid Taxable?

Most forms of financial aid are not taxable. For example, students typically do not pay taxes on student loans, grants, or scholarships. There are exceptions, however. Students must pay taxes on work-related income distributed as financial aid. Work-study earnings, for instance, qualify as taxable income.

The IRS offers resources on financial aid and taxes. Students can also direct tax and financial aid questions to their school's financial aid office.

Q. How Will Your Home Equity Affect Financial Aid?

Home equity generally does not impact financial aid. Students report income and certain assets on the FAFSA. However, families do not need to report home equity for their primary residence. The FAFSA does require information about home equity on vacation or rental properties.

In contrast, the CSS Profile requires families to report their home equity. This equity can decrease a student's financial aid because it increases the expected family contribution (EFC).

Q. How Would Capital Gains Impact My Financial Aid?

Capital gains are the profit from selling assets such as stocks and houses. Students must report capital gains on the FAFSA. The Federal Student Aid office treats capital gains as income. Students may receive less financial aid because capital gains increase their EFC. Students file the FAFSA annually, so a one-year EFC increase due to capital gains will not affect financial aid for multiple years.

Q. How Much Can a Student Earn Before it Affects Financial Aid?

Students can earn a certain amount before the income impacts their financial aid eligibility. For the 2021-22 academic year, dependent students can earn up to $6,970 without affecting financial aid. This is called the income protection allowance. Independent students and families who make less than $27,000 per year automatically receive an EFC of zero for the 2021-22 financial aid cycle.

The Federal Student Aid office counts both taxed and untaxed income. Assets and benefits such as social security or unemployment affect students' expected family contributions.

What Does Financial Aid Cover?

The cost of attendance (COA) varies by school and impacts financial aid eligibility. The COA includes tuition, living expenses, textbooks, and fees. Schools calculate aid based on the difference between the student's COA and expected family contribution.

Q. Does Financial Aid Cover Out-of-State Tuition?

Financial aid does cover out-of-state tuition costs. Public colleges and universities receive funding from the state government. In exchange, they offer a tuition discount for residents. That means out-of-state learners generally pay higher tuition rates.

However, some colleges offer scholarships for out-of-state students, which may lower costs to in-state rates. Degree-seekers in some states may qualify for tuition-exchange programs. Finally, some colleges charge all online learners the same tuition rates, regardless of residency.

Q. Does Financial Aid Cover Room and Board?

Financial aid often covers room and board, including the cost of living off campus. Since a student's COA includes living expenses, financial aid packages account for room and board.

The cost of room and board varies by school. Some colleges offer many room and board packages to accommodate various living situations and dining needs.

Q. Do You Get More Financial Aid If You Live Off Campus?

Colleges factor in housing costs when calculating each student's COA and financial aid package. At most schools, off-campus housing costs less than on-campus housing. As a result, students who live off campus typically receive less financial aid. However, in high cost of living areas, off-campus students may receive more aid.

Financial aid calculations typically use average housing costs. Students with higher housing costs may need more loans. Degree-seekers who choose to live at home generally receive less financial aid.

Frequently Asked Financial Aid Questions

Q. How Will I Get My Financial Aid Money?

Your school's financial aid office will distribute your financial aid. Depending on the type of aid, the school may apply funds directly to your tuition or room and board. Students may also receive a deposit. The timing of the disbursements depends on the school and the type of aid. Contact your school with specific financial aid questions.

Q. Do I Have to Pay Back Financial Aid?

Recipients must pay back certain types of financial aid. Federal student loans and private loans require repayment. Students do not repay scholarships or grants. When students take out loans, they agree to repayment terms. Borrowers typically have 10-30 years to repay loans.

Q. How Many Years Can You Get Financial Aid?

Students can receive financial aid while enrolled in a degree-granting program. Recipients must be making good progress toward their degree. Some aid programs place extra limits on awards. For example, Pell Grant recipients remain eligible for 12 terms, or about six years.

Q. How Does Applying Early Decision Impact Financial Aid?

Applying early decision can affect financial aid options. Admitted students cannot compare multiple financial aid offers to choose the best one. However, if the financial aid package does not meet the applicant's needs, they can turn down the admission offer, even at schools with binding early decisions.

Q. Is Financial Aid Available Only to U.S. Citizens?

Many forms of financial aid only support U.S. citizens. For example, international students cannot apply for federal financial aid. However, international students can apply for scholarships. Some foreign governments offer grants for citizens attending school in the United States.

Portrait of Genevieve Carlton

Genevieve Carlton

Genevieve Carlton holds a Ph.D. in history from Northwestern University and earned tenure as a history professor at the University of Louisville. An award-winning historian and writer, Genevieve has published multiple scholarly articles and a book with the University of Chicago Press. She currently works as a freelance writer and consultant.

See articles by Genevieve

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