Do you have to pay taxes on Pell Grants

Susan Fernandez November 11 2021

A college education is a nightmare for students. There are many ways that students can ask for loans to pay their tuition fees, but those tuition fees are mostly issued at high-interest rates. 

Students have to pay back double the amount, to begin with. It is not a desirable situation for anyone. Therefore, people look for alternatives. 


Do you pay taxes on Pell Grants?

It is one of the best alternatives for students who want to go through college without any debt. Pell Grant is an educational grant that helps the financially underprivileged to finance their education. It provides aid up to $5500 per year; it means, if you are given this grant then you do not have to take any financial aid or loans.

Pell Grants exempts certain income threshold restrictions like income curbs, tax liability, and loan indebtedness. This allows students to have part-time jobs along with full-time study; they can even work during summers and breaks without worrying about losing eligibility.

Pell Grant is one of those ways. A Pell Grant can be considered a gift aid issued from the U.S. Department of Education (DOE). It is given only to undergraduate students. For it, students have to show their Expected Family Contribution (EFC).

If you are a US citizen and qualify academically then you can apply for FAFSA forms. However, do remember that as long as your parents’ economic status does not change significantly during the year then you will be able to claim your funding.

These records will determine if you are eligible for financial aid to afford the costs of college. Your cost of attendance (COA) is also taken into consideration. 

The amount of Pell Grant depends on certain factors such as:

  • The number of hours you have been enrolled in college each semester
  • The amount of money your family might have saved for your education
  • Your Expected Family Contribution (EFC)

The cost of your attendance will determine the amount for your tuition fees and living expenses. But here is one thing to keep in mind. Whereas the funds for your tuition, books, and school supplies do not have taxes on them, you have to pay tax for your living situation. 

This annual gift assists more than 9 million students all across the US who are eligible for conditions. College students receive pell grants, so it helps them complete their education without any burden of debts. It is a non-repayable financial aid that does not need to be repaid by you or your family.

Pell Grants are only given to those students who have the desire to study and meet all the requirements as specified by DOE. Pell Grants can also be called "last-dollar" grants, because their funds are applied after applying for other forms of financial aid like loans, scholarships, etc.

If you look at the bigger picture, Pell Grants are a ticket to tax-free funds if you are responsible enough to spend the funds on your educational expenses. 


For what can you use Pell Grant?

  1. For tuition and fees
  2. For books and supplies
  3. For living expenses 

Pell Grants do not cover the cost of room and board or any personal expenses such as travel, clothes, or entertainment. These things are not covered by the grant at all. So you must be responsible enough to manage your finances if you want to receive a Pell Grant. There is no sense in taking more loans than required; it'll only increase your debt load for years!

Do proper research before deciding how much loan amount will help you study with ease. Eligibility criteria can change from time to time so stay updated on any new changes that might occur in the rules for this grant!

Tax-free Expenses

Undergraduate students who need financial aid can trust Pell Grants blindly. Pell Grants are tax-free, and you can apply for up to 6,195 dollars for your one academic year. 

IRS has made fellowship grants, scholarships, and funds for students in the same category tax-free. But some conditions need to be considered as well. These conditions are:

  • The funds must be used for educational expenses only.
  • If you do not spend the money wisely, then the tax exemption will go away.
  • You need to show your Pell Grant records when filing taxes at the end of each year.

Pell Grants are free if you want to get them however costs may vary depending on your EFC and COA. There are many students who cannot afford pell grants even with the help of other financial aids, but there are some students who can pay for their own education by using part-time jobs or working during summers or breaks without any workload issues.

Pell Grants have a formula for the cost of attendance at your school subtracted from your family’s expected contribution (EFC). If you only ask for funds for your tuition, school fees, supplies, and books, then it is guaranteed that you will be issued tax-free funds. 

Taxable Expenses

Some students who come from different states or cities have to look for residency as well. Keep in your mind that Pell Grants do not consider your residential expenses tax-free. If you are spending money on your car, it is deemed taxable, and you will have to pay the tax. 

Tax Return Aids

Students are advised to pay extra attention when filing tax return forms or to apply for financial aid. The forms have many things that are considered as your funds but are taxable. There are specific guidelines to make students aware of what kind of funds they need to apply for.  After all, you and your family will need to pay taxes on the amount of money you receive.

Are Federal Work-Study Programs Taxable Income?

No, but the money you earn from them may be considered taxable income. But in general, all federal and state grants and scholarships are tax-free and don't need to be reported as income on your FAFSA or financial aid application.


How to Apply for Pell Grants?

Pell Grants are not made until you complete your application form and submit it to the institution. Thus, in order to secure your funds, be sure to file for a loan application in time and do not take any chances!

You can apply for the Pell Grant either by filling out a FAFSA form or by using an institution’s own process. If you need help with filling out the FAFSA forms, there is nothing better than free resources.

What do you Need to Claim on Your Taxes?

  • Tuition and fees
  • Books and Supplies 
  • Cost of living expenses, which include housing, utilities, groceries, transportation costs, or any other kind of personal spending. It is advisable to keep all the receipts from these expenses in a separate folder for your records. 

Taxes will be lower if you claim for tuition only as it is probably the highest expense during your study life. You can claim up to 6195 dollars annually on your tax return. If you do not qualify for this amount then you can go through an income tax return form with help from counselors or the financial aid offices at universities.

Guidelines for Educational Funds

You do not have to mention your educational expenses on your tax return forms as long as your expenses are qualified. 

If you are filing for taxes, do mention things unrelated to your qualified educational expenses, such as room and board. If you opt for federal work-study programs, you have to mention it on the forms since you are compensated on these programs. 

FAQs: taxes on Pell Grant 

-Who has to report educational funds?

If you are filing taxes and you received any kind of income for education-related expenses, such as room and board, textbooks, supplies, transportation, etc.; then you need to add it on your return forms.

-What happens when I claim Pell Grant on taxes?

The Pell Grant is a federal grant given by the government which does not need to be paid back. Thus there is no tax involved in the process and students do not have to pay anything else while filing tax returns. However, if we miss some things then we might end up paying some tax on that depending on how much we receive.

-How much do I pay if it is taxable?

You can get a refund on your Pell Grant, but not always for the whole amount. For instance, if you received $10,000 in that year and paid $2000 tax then you will receive $8000 back.

Thus sometimes it may be good to apply for education grants which are non-taxable so that the government does not take any portion of our money after receiving it. But keep in mind that this option is available only when you stay outside the US or your studies are done online.

As far as FAFSA is concerned there are no provisions for getting occasional refunds when doing taxes on educational funds like Pell Grants. If someone misses out on his/her expenses information while filling the form then they might miss out on a part of the refund.

But if you have been staying outside the US then it is probably better not to claim your Pell Grant on taxes since that will help in avoiding future issues.

-Can I take aid from other sources while filing taxes?

Yes, you can add other education funds received by you while filling out the FAFSA form. This includes scholarships and private loans.

-How much do I pay for educational expenses when I file taxes?

This depends on how many resources one uses to finance their study. If only Pell Grants are used then no tax has to be paid back while filing returns but if there are loans or work-study programs involved then students should calculate accordingly and mention it accordingly on return forms. 

Bottom line

There are many loopholes in the system, and you can either take advantage of them, or they take advantage of you. It is up to you how close you are to paying attention while filling such forms. 

But Pell Grants are granted to the students in need, and if you use these funds on qualified expenses, you have nothing to worry about!