<p>I am trying to understand how scholarship money won would play a role. Kid is going to an elite college on full financial aid. She receives room, board, books, travel etc. etc. We have zero parental contribution towards college. Student is expected to pay $2500 for student summer work contribution. Few days ago she was notified that she would be receiving $5,000 in scholarship money from outside foundation. Since this is earned income and most of the scholarship money is taxable so she has to pay state and federal income tax on it. Let us assume that federal and state tax are say $600 dollars so left over money is $4400 after taxes. We have to send the student income and declare it on next year college aid forms. If I remember correctly, I read some 25% of this would be used as student asset so starting this year or next year we have to pay additional $1100 for next year. Or would it be used to reduce the $2500 student contribution. I am just curious that how it works. Remember we have not received any money so far.</p>
<p>The reason we are wondering if full financial aid kids should apply to work to receive additional scholarship in college to reduce student contribution and pursue their passion in summer. Thanks</p>
<p>Check with the school FA office. My D’s school would apply the scholarship money against daughter’s contribution and work/study. It would not get tacked on as free 5000 spending money.</p>
<p>What about other scholarship which may be available for college students. Would they lower first the student contribution or they would lower school contribution? </p>
<p>Could the student spend some of this money to buy some clothes etc or how about a needed laptop? Kid could use these things.</p>
<p>Scholarhip money is not usually taxable unless there is a clear connection between the money given and some expected work. On the graduate level teaching assistant money is taxable but fellowships which have no set duties or hours for receiving the money are not. Most schools that would provide need based aid would expect that a certain amount of money should be earned by the student for educational expenses and this is often included in their calculations. Schools that provide merit based monies generally will deduct outside scholarhsip money from their awards.</p>
<p>Scholarship money used to pay for things other than tuition and college fees is considered taxable income. At all of the schools DS and DD considered, if the student received outside scholarships, it first reduced loans, then work study, than grants, then scholarships.</p>
<p>“Scholarhip money is not usually taxable unless there is a clear connection between the money given and some expected work. On the graduate level teaching assistant money is taxable but fellowships which have no set duties or hours for receiving the money are not.”</p>
<p>This is absolutely incorrect. </p>
<p>As far as the OP, if you currently have a zero contribution but a summer earning contribution, the decision will be your school’s. Brown for instance would simply reduce THEIR grants by 5,000 and still expect the summer earnings. Other schools are usually more “understanding” However, I know a case where Brown added the cost of a laptop to the COA to use an outside scholarship. However, the summer earnings expectation was not waived. </p>
<p>Regarding taxes, you’ll need to look at a bigger picture. Starting with the COA, everything expect the tuition, fees, and in some cases books, IS taxable. Another way to look at it is that the scholarship money that covers room and board, travel, personal expenses, and sometimes books is taxable to the student. On the good news side, scholarship income does not cause your FAFSA to increase, and in addition your child can earn about 2,500 without triggering a change in your EFC. </p>
<p>One way to approach this would be to see if the outside scholarship cannot be restructured. Remember that the sum of ALL scholarships can never exceed the COA for financial aid purposes.</p>
<p>It also pays (literally) to make sure you pay at the student’s rate, not the parents’ rate. But then, be careful about claiming the student as a deduction - if you provide no support because of full scholarships, you may not be entitled to claim a deduction.</p>
<p>this is a case where investing $20 or so in a low cost tax program could pay off. You could run multiple scenarios to see what works out the best.</p>
<p>Echoing NMD, I also believe that running scenarios is very important. As it stands, the IRS guidelines are very nebulous -and seemingly contradictory- on the issue of who should be able to claim an exception. For instance, the IRS does not consider the amount of scholarships in determining support … or so it seems. In general terms, it is MUCH easier for the parents to be able to claim the student as a dependent (and the exemption) than being able to establish the student’s independence. Again, the good news is that difference in next taxation won’t upset the IRS too much. </p>
<p>It is, however, very important that the correct income figures are reported one either the parents or the student tax return. It is also inescapable as the renewal of the sholarships are subject to revision of the tax returns for both parents and students … unless the financial aid office is deep asleep. This said, I know for a fact that many studens are playing russian roulette and ignoring the tax consequences of their scholarships, often relying on extremely misleading advice about this issue.</p>
<p>PS Three is hope for this to change in the future. Legislation has been introduced by Rep English to undo this most egregious tax, that reflects how poorly some our laws have been crafted. Students who are hit by this tax are also receiving Pell grants. A logical step would be to realize that Pell and SEOG grantees should not be taxpayers.</p>
<p>I see your kid is going to Yale. this is their policy:</p>
<p>Yale encourages all students to apply for any outside scholarships for which they may be eligible. Federal Pell grants, state scholarships, school and college grants to children of employees, as well as other entitlement awards, replace University funds in the gift portion of a student’s financial aid package. </p>
<p>Yale policy allows outside merit scholarships to first reduce your self-help. Therefore, outside scholarships of up to $4,200 will replace your self-help (work study and loans). </p>
<p>***Additionally, we also allow outside scholarships to cover your student income contribution of $1,650 (subject to federal guidelines). ***This means that a total of up to $5,850 in outside scholarships will be applied toward your student effort (the total of your self-help and student income contribution). If the total of your outside awards exceeds your $5,850 student effort, the remainder will replace your Yale Scholarship.</p>
<p>Bottom line is this: based on Yale’s stated policy, your D’s outside scholarship will first reduce her self help aid (any workstudy she has in her package since you have already stated she has no loans).</p>
<p>Then the outside scholarship will replace 1650 of her student contribution, leaving her with a student contribution of $850 which she will have to come up with.</p>
<p>any monies left over will reduce the Yale scholarship</p>
<p>In the past, IRS rules required that the person claiming the deduction provide 50% or more of a dependent’s support. That is no longer the case. Now, as long as the dependent provides less that 50% of his/her own support, the parent may still claim the deduction - even if the parent provides no support - as long as the parent meets all other rules from claiming the deduction. Scholarships are not considered support provided by the dependent.</p>