Federal Taxation of Student Aid: An Overview

Publication Date: February 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

This report summarizes the current rules regarding federal taxation of financial aid for students enrolled in colleges, universities, and other postsecondary educational institutions. Most financial aid provides income to students, so the question arises whether they must pay federal income taxes on it. Some aid also involves employment, so students may have to pay Federal Insurance Contribution Act (FICA) taxes as well.

Scholarships and fellowships (including grants) generally are not taxable if they are used for tuition and required course expenses. Tuition reductions also are not taxed. However, both types of aid are subject to income and sometimes FICA taxes to the extent that they represent payment for services. Neither veterans' education benefits nor loans are taxable; however, loan amounts that are forgiven or otherwise discharged generally are subject to income taxes. Work-study awards are subject to income and sometimes FICA taxes. Employer tuition reimbursements are taxable unless they qualify as a deductible business expense or are provided through an employer education assistance program under Section 127 of the Internal Revenue Code.