College is expensive. In the 2024–2025 school year, the average cost of tuition and fees was:
- $43,350 at private colleges
- $30,780 for out-of-state students at public colleges
- $11,610 for in-state students at public colleges
And that’s just tuition — you also have to pay for housing, food, books, supplies, and more. The good news? Many students get financial aid, and your child might too.
But if your child receives financial aid, do you have to pay taxes on it?
Here’s a simple breakdown.
What Is Financial Aid?
There are two main types:
- Free money (gift aid):
- Includes scholarships, grants, fellowships, or tuition discounts
- Your child doesn’t work for this money
- Usually not taxable, as long as it’s used for education costs like tuition, books, and supplies
- Work money (like work-study):
- Your child has to work for the money (e.g., helping in a lab, cafeteria, or office)
- This money is taxable and must be reported as income
When Financial Aid Is NOT Taxed
If the money is used for:
- Tuition
- Books and supplies
- Other education-related costs
And your child is enrolled in a degree program, then the money is not taxed.
BUT: If the aid is used for room, board, travel, or personal expenses, that part is taxable.
Work-Study and Job Payments ARE Taxed
If your child gets money for working (even if it’s called a scholarship), it counts as employment income. It must be reported on their tax return.
They may get a:
- W-2 form if treated as an employee
- 1099-MISC form if treated as an independent worker
Will My Child Owe Taxes?
Not necessarily. Even if some financial aid is taxable, your child might not owe anything.
Why?
- In 2025, the standard deduction is $15,000 for single students.
- If your child earns less than that, they likely won’t owe any federal income tax.
- If they’re your dependent, their standard deduction is slightly different, but still helpful.
Tax Credits Can Help Too
If you don’t claim your child as a dependent, they might qualify for:
- American Opportunity Tax Credit — worth up to $2,500/year (for the first 4 years of undergrad)
- Lifetime Learning Credit — worth up to $2,000/year
These can reduce or even eliminate their tax bill.
Please reach out to your Wegner Tax Advisor if we can help with answering your college financial aid questions.
