Do You Pay Tax on Your Child's College Pell Grant?

by Mike Parker

    With a year at a public university costing more than $17,000 for the 20011-2012 academic year and rising, according to the website Finaid.org, it's no wonder that around two-thirds of undergraduates rely on some type of financial aid, such as the federal government's Pell grant, to help make ends meet. Pell grants are needs-based scholarships that take into account the financial resources of both students and their parents. In some cases a portion of the grant might be taxable.

    The Federal Pell Grant Program is the successor to the government's old Basic Educational Opportunity Grant program. It provides need-based grants of up to $5,550 for the 2011-2012 academic year, primarily to undergraduate students based on such factors as the student's expected family contribution, enrollment status as a full- or part-time student and the cost of attending the institution. Pell grants, unlike student loans, don't have to be repaid.

    The Internal Revenue Service considers Pell grants to be needs-based scholarships for income tax purposes. Needs-based scholarships are free from federal income taxes to the extent they are used to pay for qualified educational expenses, such as tuition, books, fees, equipment and supplies that are required for enrollment or attendance.

    Any scholarship or grant money that is awarded to a non-degree candidate student is usually fully taxable as income, according to the Internal Revenue Service. The IRS also considers any scholarship or grant money that is used for purposes other than qualified educational expenses, such as to pay room and board or transportation costs to and from school, to be taxable income.

    Pell grants are typically paid to the college on behalf of the student. The college will apply the grant toward any tuition, fees and other expenses the student owes, such as room and board, then pay whatever is left directly to the student. The money may come in the form of cash, check or a credit to the student's designated bank account. Any grant money used for another purpose must be reported as taxable income. Even though the parents' financial resources are used to determine the student's eligibility for a Pell grant, the Pell grant belongs to the student, and any income tax liability rests with the student, not the parents.

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    About the Author

    Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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