Use of Pell Grant Money

[diebierwinkel]

State: AZ

Hello. I am currently a student, and this year I am getting a lot more Pell Grant money than I did last year. I know that any grant money I use for non-school related expenses becomes taxable income, but I am wondering where that line gets drawn. I plan on using that money to pay off the student loans I accumulated last year when I did not qualify for much grant money, so I was wondering if it would still be taxable. I'm guessing it is taxable since student loan payments probably are not considered a direct educational expense, but figured I should ask people who know more than I. Any insight is appreciated!

 

[Taxing Matters]

The Pell grant is taxable income unless you spend on qualified tuition and related expenses (QTRE). Using it to pay off student loans would not be a QTRE and thus those funds would end up being taxable. Note too that there is a somewhat complex relationship between how you allocate the Pell grant between living expenses and QTRE and the education credits you can claim. A lot of students don't realize that in some cases they actually may benefit by allocating some of the Pell grant money to living expenses and taking that in as taxable income in order to boost the tax credits they can get. See the IRS discussion of that in this Fact Sheet.

 

[diebierwinkel]

That is what I figured. Oh and thanks for the fact sheet on the tax credits!

 

[Taxing Matters]

That is what I figured. Oh and thanks for the fact sheet on the tax credits!

You're welcome. Hopefully the information will be useful to you to maximize your education credits.