How Does FAFSA Affect My Taxes?

Many students need additional financial support to get through school. The federal government provides several options for financial assistance, which students can apply for through the FAFSA. If you’re eligible though, is your financial aid taxable?

Here’s what you need to know about FAFSA and taxes.

What is FAFSA?

The Free Application of Federal Student Aid (FAFSA) is an application form students can complete to determine eligibility for student aid from the government. The government has a variety of financial assistant programs, including scholarships, grants, student loans and work-study programs offered through FAFSA.

How does FAFSA affect my taxes?

Is your federal financial aid taxable? In short: it depends. Each type of financial aid has different tax obligations.

Student loans taxes

Student loans are not counted toward your taxable income as they will be repaid.

Additionally, under the American Recovery Act, student loan debt that is forgiven is tax-free at the federal level through 2025 (state taxes may still apply).

Student loans forgiven or canceled based on your choice of career are also tax-free.

Grants and scholarships taxes

If you are awarded a scholarship or grant as part of your federal student aid award, they typically do not have to be repaid like student loans. Plus, you may be able to use those funds entirely tax free.

To keep your grants and scholarships tax free you must follow these simple guidelines:

You must be pursuing a degree at your school or a training program for specific types of employment.
The money must be spent only on tuition, books, supplies, fees, and equipment required for school courses.
You cannot use the funds for school-related travel expenses or room and board.

Any funds you use for non-approved expenses must be reported on your tax return as taxable income.

For example, if you receive a $10,000 grant and use $8,000 on tuition and $2,000 on room and board, that $2,000 is taxable and must be reported as income on your tax return.

Additionally, if your grant or scholarship has teaching or research requirements, any money you make for that work is taxable.

Pro Tip: You may be able to save more on taxes by spending a portion of your grants or scholarships on non-qualified expenses. That will then count as taxable income to qualify for educational credits that lower your tax bill. In other words, any non-grant or scholarship money you spend on remaining qualified educational expenses may make you eligible for a tax credit under the American Opportunity Credit.

Work-study program taxes

Work-study programs are part-time, on-campus jobs designed to reduce your tuition costs. However, the income you earn through the work-study program is subject to state and federal taxes. FICA taxes will also be withheld from your paychecks unless you are enrolled in college full-time and only work part-time (less than 20 hours a week).

Note: Work-study programs are not the same as regular part-time jobs. If you are not awarded work-study as part of your financial aid package, any income you earn from a part-time job will be taxable (and could impact your financial aid eligibility when you submit your FAFSA form).

Tax breaks for student loans

Tax credits and deductions for education expenses can further reduce your tax burden come tax season. Here are a few options you may be eligible for.

Student tax credits and deductions:

American Opportunity Credit: This credit allows you to claim up to $2,500 for qualified education expenses.
Lifelong Learning Credit: This credit allows you to claim up to $2,000 for qualified tuition and related educational expenses. Students must be enrolled in an eligible institution and pursuing an undergraduate, graduate, or professional degree courses–including course to improve or acquire job skills.
Student loan interest reduction: If you paid student loan interest, you can claim a tax deduction on your return for up to $2,500.

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Frequently Asked Questions

Does FAFSA affect my taxes?

FAFSA itself does not affect your taxes. It’s simply an application for financial aid. However, some types of aid you receive through FAFSA, like grants or work‑study income, may have tax implications.

Do I have to report FAFSA on my tax return?

No. FAFSA is just a form and is not reported on your tax return. Only certain types of financial aid you receive as a result of FAFSA may need to be reported.

Are Pell Grants taxable?

Pell Grants are tax‑free when used for qualified education expenses such as tuition, fees, and required course materials. Any portion used for room, board, or other non‑qualified expenses may be taxable.

Is work‑study income taxable?

Yes. Work‑study earnings are considered taxable income. You’ll receive a W‑2 from your school and must report those wages on your tax return.

Do student loans affect my taxes?

No. Student loans are not taxable, and you don’t report them as income. However, you may qualify for a student loan interest deduction if you paid interest during the year.

Does financial aid reduce my tax refund?

It depends. Tax‑free aid (like grants used for qualified expenses) doesn’t affect your refund. Taxable aid such as grant money used for room and board or work‑study income, increases your taxable income, which may reduce your refund.

Do I need my tax return to complete FAFSA?

Yes. FAFSA requires information from your (or your parents’) tax return. Most applicants use the IRS Direct Data Exchange to automatically transfer tax information into the form.

Do scholarships and grants received through FAFSA affect my taxes?

They can. Scholarships and grants are tax‑free when used for qualified education expenses but taxable when used for non‑qualified costs. FAFSA doesn’t change these rules, it just determines your eligibility.

Can I file my taxes online if I received financial aid?

Absolutely. Most tax software can help you enter grants, scholarships, and work‑study income correctly so you file accurately and avoid delays.

Can ezTaxReturn help me report financial aid correctly?

Yes. ezTaxReturn guides you through entering scholarships, grants, and work‑study income step‑by‑step so you know exactly what’s taxable and what isn’t. It also checks your return for accuracy to help you get your refund as fast as possible.