Do Student Loans Count as Income? Your Questions Answered

Have you ever wondered whether student loans count as income? We’re going to discuss that and more in this guide.

Main image courtesy of Jotform.

Heading off to college is always an exciting time. Once you decide on what school you’d like to attend, one of the first things you should do is consider filling out the Free Application for Federal Student Aid (FAFSA). This form will take into account your parents’ taxable income and determine the amount of federal aid you qualify for. Once you know that amount, you’ll be able to get a clearer picture of what college is going to cost.

The amount of aid you receive can come in a variety of forms, including student loans. This may prompt you to question, do student loans count as income? And what about the other types of student aid you receive, are those considered income too?

We’re glad you asked, because this can be incredibly confusing to students and their families. In this post, we’re going to cover:

  • The different ways you can pay for college
  • Whether student loans count as income, as well as other forms of aid
  • Is there student aid that is not taxable?
  • How loan forgiveness plays into all this

Different Ways to Pay for College

What are the different ways you can pay for college?

person filling out a student loan form

By filling out the FAFSA each year, you’ll see what amount of federal aid your quality for. Image courtesy of Form Pros.

Before we start discussing whether or not student loans specifically count as income, we thought it would be helpful to go over the different ways that are available to students to pay for college.

  • Student loans. We’re sure you’re already aware of student loans, as many students take these out in order to pay for college. In order to see what amount of federal loans you qualify for, you’ll need to fill out the FAFSA. But did you know you can also take out private loans? In order to do this, you’ll want to do some research into banks and other financial lenders and determine if that option is a good one for your situation.

  • Grants. In addition to student loans, when you fill out the FAFSA you may find that you also qualify for federal grants. This is money that does not need to be paid back—unlike loans. 

  • Scholarships. Scholarships are another way that you can pay for college that you do not have to pay back. There are all kinds of scholarships out there, so it’s important that you do your research. You may qualify for scholarships based on your gender, ethnicity, military status, academic performance, or even what major you choose to study in school

In addition to federal and state level scholarships that may be available, it’s always a good idea to check with your local city or town too. Many clubs and organizations offer scholarships to local candidates.

  • Work study. When you fill out the FAFSA form, you may also find that in addition to loans, and grants, you also qualify for a work study program. This will allow you to find a part-time job either on or off campus. The money you make with this work can go directly to your tuition payment or into your bank account for other expenses.

  • Savings. When you still seem to come up short, you can always choose to dip into your savings or the savings of your parents. Many parents choose to open a 529 college savings account. This type of account will allow you to make tax-free disbursements in order to pay for the cost of college. 

Do Student Loans Count as Income?

If you choose to take out student loans, will that count as income too?

piggy bank for saving money for college

According to the IRS, student loans do not count as income. Image courtesy of Forbes

After you’ve decided on your best way to fund your college years, you may be left with a looming question: do student loans count as income? And will you need to pay taxes on them each year? You may be relieved to know that no, the government does not consider federal or private loans income. This is due to the fact that since they are loans, at some point they will need to be paid back. That means you won’t have to worry about paying taxes on your student loans.

In addition to student loans, there are other forms of college payment that are not considered income and are not taxable.

Scholarships used for school expenses 

We mentioned earlier that scholarships are a great way to pay for college since you are not responsible for paying that money back. These are also not considered income as long as you can verify with the IRS that you are a degree-seeking student and you’re using the money from the scholarship for books, tuition, and other related expenses. 

If you want to use your scholarship money to pay for other items such as room and board, you will need to declare that so that it can be taxed accordingly.

Resident advisor expenses

If you happen to have a resident advisor (RA) assignment, typically this is done in exchange for free room and board. The expenses that would have been incurred as room and board are not considered income in this situation because they are a condition of your employment. When you sign up to be an RA, you understand that you will live on campus in the dorm.

If you are an RA, that money is not considered income and is not taxable, unlike the scholarship money used to pay for room and board, which is taxable.

Certain savings plans

Although you may be able to pull money to pay for school from a variety of savings, if you happen to have a 529 college savings account or a Coverdell savings plan you can also draw from these without having to pay taxes on them.

Is There Student Aid That is Considered Income?

If you are paying for college from different sources, it’s best to know which ones are considered income for tax purposes

person researching their student loans

Some sources of student aid are considered income by the IRS. Image courtesy of U.S. News Money.

While student loans are not considered income, there are some student aid sources that are—which means that they’re also taxable. 

Student athlete stipends

Sometimes student athletes are given a stipend that is a part of their scholarship. If this applies to you, and you’re using this stipend to pay for your room and board (or other miscellaneous expenses) this is considered income by the IRS. Stipends operate much like any scholarships or grants you have if you’re using to pay for anything other than tuition, books, and other required school supplies.

Work study programs

If you have been offered a work study program, this is considered income and taxable since you can choose to use this money for a variety of different things. Even if you’re using the money you earn from a work study program to strictly pay for your tuition, it is still considered income and will need to be reported. 

Employer-sponsored tuition

If you are returning to school and have enrolled in classes and are receiving tuition reimbursement from your employer, this can also be taxable. Any amount over $5,250 that you pay towards school is considered taxable.

Although there are certain things that you’ll need to declare as income and taxable, the majority of students have found that the sources they’re using to pay for college are not taxable. None of your loans are considered income, which is why a lot of students use these to not only help with tuition, but room and board as well. As long as you delegate any scholarships or grants towards tuition and books, you won’t have to worry about declaring those on your taxes as well.

What About Student Loan Forgiveness?

If you qualify for a student loan forgiveness program, is your balance considered taxable?

If you have qualified for a student loan forgiveness program such as the Department of Education’s Public Service Loan Forgiveness Program, you will not be taxed on the amount of the loan that you do not have to pay. In order to qualify for this, you must work for a qualifying employer, and make 120 consecutive payments towards your loan on an approved payment plan.

If you have your loan cancelled or discharged due to permanent disability or if your school has closed, the amount that you have unpaid could still be taxable. In order to find out if your loan would still qualify as taxable income, it’s recommended you speak to a tax professional. 

Paying for college may seem daunting, but there are a variety of ways you can do it. Knowing that your student loans do not count as income allows you to use them to pay for tuition as well as room and board. It’s also good to know that any scholarships and grants you receive can also be used to pay for tuition, without counting as income. 

Bridget Houlihan
Bridget is a writer based in Pittsburgh, PA.
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