Senate Bill Would Fully Exclude Pell Grants from Taxable Income

The change would only apply to students whose tuition and other expenses are less than $4,000.

This is a photo of a financial aid application.

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As students prepare to apply for federal student aid this winter, local colleges are hopeful that a bill proposed in Congress will allow some low-income students to use awarded funds however they need without penalty.

U.S. Sens. Chuck Grassley and Sheldon Whitehouse introduced legislation last week to fully exclude Pell Grants from taxable income and better coordinate the grants with the American Opportunity Tax Credit.

The Tax-Free Pell Grant Act would allow students to use Pell Grants for living expenses without being taxed for them. This frees them up to claim education tax credits, for which many Pell Grant recipients are also eligible.

“We expect students to work hard in order to maximize their academic success while in school. Likewise, we ought to ensure our tax code is set up to maximize students’ financial success as they pursue higher education,” Grassley said in a news release. “This bipartisan proposal would cut through confusing tax rules and permit young Iowans to take full advantage of available financial aid.”

According to a news release, students can receive up to $2,500 for tuition and course materials through the American Opportunity Tax Credit. By making Pell Grants tax-free, students would no longer have to subtract their Pell Grant amount from expenses for which they claim the tax credit.

This change will primarily affect students attending lower-cost higher education institutions like community colleges. That’s because it only applies to those whose tuition and other expenses are less than $4,000. Iowa Central Community College President Jesse Ulrich said the college has been advocating for this for many years, as around 80% of its students have financial need.

According to the U.S. Department of Education, the maximum amount a student could receive through a Pell Grant for the 2023-2024 school year is $7,395.

How taxes on the grant work right now, Ulrich said, it’s almost like a punishment for students who are trying to make the best choices for their financial situation and academic career.

“For these students, it’s kind of a double-edged sword,” Ulrich said. “Because community colleges are so affordable that sometimes with (students’) scholarships and Pell Grants, they utilize them for living expenses and then that’s what they really get taxed on.”

The community college works to help students applying for financial aid, having one-on-one meetings to ensure they know how to correctly file and laying out everything they will receive through their financial aid package, and how that will impact them. One piece of advice staff gives students is to not take too much aid, as it could hurt them later on, like with the current Pell Grant taxing process.

Changes coming in student aid application process

The Free Application for Federal Student Aid (FAFSA), through which Pell Grants and other aid are awarded, has seen other changes this year that will affect students, including when the FAFSA opens for applications and how aid is calculated.

Students used to be able to begin their FAFSA application at the beginning of October, but this year the date has been pushed back to December. The form has also changed to allow those filing to pull tax information directly from the IRS.

Pell grant eligibility has been expanded to include incarcerated students and those whose school closed while they were enrolled or who were found to have “misled” them, according to the U.S. Department of Education.

The Expected Family Contribution, which was used to measure a family’s ability to pay for college, has been changed to the Student Aid Index. It has removed how many students in the family are in college from the formula and has allowed the result to be negative, showing a fuller range of need than the previous formula, which couldn’t go below zero.

Ulrich said the community college does its best to stay up-to-date with changes and provide that information to students who need it.

“It sometimes feels like building the plane while it’s in the air,” Ulrich said. “But we do the best job that we can to communicate with our students so that they don’t have a financial crisis because they didn’t know.”

Iowa Capital Dispatch is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Iowa Capital Dispatch maintains editorial independence. Contact Editor Kathie Obradovich for questions: info@iowacapitaldispatch.com. Follow Iowa Capital Dispatch on Facebook and Twitter.

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