Scholarships, Fellowships, and Other Education Assistance

Higher education pays off in greater lifetime earnings, says the U.S. Census Bureau (https://www.census.gov/prod/2002pubs/p23-210.pdf). But higher education isn’t cheap, and most students and their families can’t pay the full ride from their own resources. According to the National Center for Education Statistics (http://nces.ed.gov/fastfacts/display.asp?id=31O), as many as 85% of students receive some form of financial aid for higher education. What does this mean for students, parents, and other people who help with their education? Here are some of the implications for them.

Tax-free treatment for scholarships and fellowships. These payments are tax free to the extent used for tuition and course-related fees, books, supplies, and equipment that are required for courses, provided the student is a degree candidate. Tuition reductions received for teaching, research, or other services required as a condition of receiving a grant usually are taxable.

Most Fulbright awards are taxed as wages for teaching, lecturing, and research. If the award recipient is abroad, the wages can qualify for the foreign earned income exclusion, and thus become nontaxable.

Tuition reductions for college employees. Free and partially free tuition provided to a faculty member or school employee for undergraduate studies is tax free. Tax-free treatment also applies to tuition reductions for spouses, dependents, former employees who’ve retired or left on disability, widows and widowers of former employees, and a child under age 25 whose parents have died.

Tuition reductions for graduate courses are tax free if it is in addition to payment for teaching, research, or providing other services.

Student loans. Obtaining a loan to pay for education is not taxable. The interest paid on the loan is tax deductible by the borrower up to $2,500 a year for those with income below set levels.

Usually, the cancellation of student loans is taxable income to the student borrower. However, if a loan by a government agency, by a government-funded loan program of an education organization, or by a qualified hospital organization is canceled because of working in a certain geographical area in certain professions (medicine, teaching), the debt forgiveness is tax free.

If a person promises does not fulfill the work obligation and must repay the loan forgiveness, the repayment is not tax deductible (Dargie, No. 13-5608, 6th Cir. 2014).

IRA withdrawals. Taxpayers under age 59¹/₂ can take penalty-free withdrawals from IRAs to pay tuition for themselves, spouses, and dependents. Using IRAs for education usually isn’t advisable because it reduces the funds available for retirement.

Bottom line: There are various tax breaks that can help you pay for higher education for yourself and your family. Explore your options!

Source: Dargie, 6^th Cir.