Going to college is almost non-negotiable in modern society. If you plan to enter any job industry, there’s a high chance you’ll need at least a bachelor’s to land an entry-level position. Earning a degree has become the new high school diploma. Employers are on the lookout for candidates who have put in the time to master the basics of their field, or at least dedicated four years of their adult life to higher education.
In reality, a degree represents more than just knowledge and skills to employers. It’s a sign of your commitment, determination, and ambition. But how are you meant to pay for it when bachelor’s degrees range from $20,000 to $160,000 in America? Even if you’ve been saving, or your parents started an account when you were born, it might not be enough to cover the total cost. As such, it might be necessary to use external funding, including loans, grants and scholarships. So, when it comes to doing your taxes, how you pay for your education does make difference. In this guide, we’ll go over everything you need to know about the tax implications and education funding.
How Do Student Loans Affect My Taxes?
It’s important to note that if you’re still currently going to school and receiving student loans, it doesn’t affect your taxes. While you or your parents do have to claim any interest, it doesn’t have a negative repercussion. In fact, there are many situations in which you can receive a credit for being in school. On the other hand, if you already graduated and are making payments on your loans, you may be to deduct these payments from tax burden. Your eligibility will depend on your income and filing status.
Grants and Taxes
Grants are considered gift aid. This means you aren’t obligated to pay them back. However, in certain situations, you may be obligated to report them as income. Grants are tax-free, and can be excluded from your return is the following conditions are met:
You’re attending an accredited institution
The grant amount doesn’t exceed qualified tuition expenses
The money isn’t given as compensation for teaching
Funds aren’t used for room and board
Similar to grants, you may not need to report a scholarship as income. Just like the guidelines for grants, scholarships must not surpass your qualified learning expenses. These types of expenses typically include the following:
Tuition paid to your school
Books and learning materials
Supplies, including laptops
Student activity expenses
Lab fees or other mandatory charges from school
Scholarships are meant to alleviate their financial strain, not add to it. For this reason, as long as you use the scholarship for education and not personal expenses, you won’t have to claim it as income.
How to Find Scholarships for School
The easiest way to find scholarships for college students is to head online. The internet provides access to different scholarships and makes it easy to apply to many at once. You should look for scholarships based on your personal needs. There are some meant specifically for students in a particular degree, People of Color, first-generation college students, and much more. Be mindful, however, that scholarships have requirements for both applicants and recipients.
This means you’ll need to meet the criteria in order to keep any aid you receive. The bigger the scholarship, the stricter the criteria. If you are lucky enough to land a partial or full-ride scholarship, you’ll have to maintain a certain grade point average and possibly make certain contributions to your field. The exact requirements for every scholarship will vary, so make sure you pay close attention before applying.
What to Know About Paying Taxes as a College Student
Education benefits help you avoid high tax liabilities while you’re in school, and they can even help you save money in the long run. In addition to finding free ways to pay for college, you can use your taxes to avoid any unnecessary penalties or lower your total liability. In order for qualified education expenses to be accepted by the IRS, you must pay them during the academic period during that tax year or during the first three months of the next year.
For students receiving the American Opportunity Tax Credit (AOTC), books you purchase off-campus, like from a second-hand store, can still count toward your expenses. The AOTC is available to students enrolled in their first undergraduate program. It covers 100% or the first $2,000 of qualified expenses and 25% of the next $2,000. Note that in order to claim this tax credit, you must be in your first four-year degree program and be enrolled at least part-time during the academic year.
The Bottom Line
Tax credits, scholarships, grants, and loans can all make paying for college easier. Be sure to factor in any financial aid you receive into your bigger financial picture as you plan out your budget for the upcoming year.