Do you owe taxes on your college aid?

College ‘can’t just be for rich folks’

Getting a big scholarship or grant to pay for college can be a huge relief.

But at least a portion of that free money may not be entirely free. That’s because some of it may be taxable.

Here are some types of college aid — including student loan debt forgiveness — that could trigger a tax bill:

Scholarships: So long as a scholarship is used to pay for a degree candidate’s tuition, fees, books and related supplies, that’s generally treated as tax-free at the federal and state levels.

But if some part of it is used to pay for room, board, personal expenses and travel, it’s treated as taxable income to the student at the federal level. States generally follow federal law in this regard, but some states may choose to diverge, according to Wolters Kluwers Tax & Accounting US.

Consider a low-income student who qualifies for Harvard’s most generous package, which pays for everything: tuition, room, board, personal expenses and travel. For the 2015-2016 academic year, that could be worth close to $ 70,000. Of that amount, roughly $ 23,000 may need to be counted as gross income to the student. (Other premier schools, like Stanford, Yale and Princeton, also offer very generous packages.)

After accounting for the student’s standard deduction and assuming his parents claim him as a dependent, his federal tax bill could hit $ 2,000, according to enrolled agent Bill Nemeth. If his parents can’t claim him as a dependent, he would owe less — a little north of $ 1,400.

Related: Poor kids, rich schools

Those amounts may be reduced if the student also qualifies for any tax credits.

What’s more, the student would not owe Social Security and Medicare tax on any of his scholarship money, according to student aid policy expert Mark Kantrowitz of Edvisors.com.

So will you be penalized if you didn’t think to report your scholarship on your tax return? Not necessarily. A few tax professionals CNNMoney contacted said they haven’t really seen the IRS enforce these rules when it comes to scholarship money.

Pell Grants: Like a scholarship, federal Pell Grants are treated as tax-free unless used for non-tuition expenses, such as room and board.

Fellowships: The same rules apply to fellowships.

But there’s an added wrinkle: Any portion of the fellowship intended as payment for research or teaching assistance will be taxable.

Like work-study earnings, it’s considered money in exchange for services and is treated as ordinary income.

Student loan forgiveness: There are a few instances in which a portion of your federal student loan debt may be forgiven. One of the most common is if you have signed up for an “income-driven repayment plan.”

You’d qualify for such a repayment plan if your total federal student loan debt is higher than your annual income or is a high percentage of it.

Under such a plan you may be able to lower your monthly payments and extend your repayment period. The payment may change as your income and the size of your family changes.

Related: I got into my dream school, but can’t afford to go

If you make the required monthly payments in full and on-time for the required repayment period (typically 20 to 25 years) and you have a loan balance remaining at the end of that period, it will be forgiven. But you will owe federal income tax on the amount forgiven.

One instance in which the debt forgiven would not be taxable: If you work full-time in a public-service job and have made full, on-time monthly payments for 10 years while employed in that capacity.

There’s another instance in which debt may be forgiven and exempt from taxation: If the school you attended goes belly up. The most recent example of this is the closure of the for-profit Corinithian Colleges.

Some former Corinthian students are refusing to pay their loans and are pushing to have them forgiven because they say their degrees are worthless.

The National Consumer Law Center advocates for such loan forgiveness. And Persis Yu, an NCLC attorney, noted that if those students’ federal loans are forgiven they may escape taxation, too, under certain provisions that may apply given that the federal government has sued Corinthian for engaging in illegal and deceptive practices.

IRS help, tax breaks and loopholes – CNNMoney.com

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