NASFAA joined over a dozen other higher education organizations in a letter calling on Congress to make legislative changes that would help low-income students retain more of their financial aid by repealing the taxation of federal Pell Grants, which in some circumstances can be considered taxable unearned income.
The letter, addressed to congressional leaders, notes that as the chambers work on the final reconciliation package, some higher education organizations are calling to maintain provisions in the Build Back Better Act and in the Tax-Free Pell Grant Act. The provisions in the Build Back Better Act would repeal the taxability of Pell Grants, so students may use their grants on their essential “non-tuition” living costs like housing and food and it not be taxed as unearned income.
The letter additionally notes that while Pell Grant recipients are among the students with the lowest incomes, they see little benefit from the American Opportunity Tax Credit (AOTC). A student who applies their entire Pell Grant to tuition and fees is not eligible for any tax credit, but if they apply their Pell Grant toward living costs instead, their grant aid is taxed, which “creates confusion and is financially harmful to students with low incomes,” the letter states. This issue impacts as many as 730,000 students each year, according to the letter.
The organizations are urging for the final passage of the Tax-Free Pell Grant Act, which is included in the Build Back Better Act and would repeal the taxability of Pell Grants and help hundreds of thousands of low-income Pell Grant recipients access the AOTC.
Taxing students’ Pell Grants for “non-tuition” living costs has had a negative impact since the costs of rent, food, child care, and health care have also risen in the past 35 years, the letter states. Additionally, taxing Pell Grants undermines students’ financial security, which decreases their ability to complete a degree or credential.
“Repealing the taxability of Pell Grants would permit low-income students to retain more of the critical financial aid they need to meet these and succeed in higher education,” the letter states. “It is essential that students be able to afford the costs of living at a time when research shows that three in five students struggle to find enough to eat or maintain a stable place to live.”
According to data from the organizations, approximately 3 million students have their grants and scholarships taxed. For students who receive grants or scholarships, their taxable non-tuition higher education expenses make up 72% of the total cost of attending a two-year institution, 56% at a four-year public institution, and 30% at a private, four-year nonprofit institution.
Additionally, another tax provision in Build Back Better would repeal the denial of the AOTC to students who have had a prior drug conviction, which aligns the tax credit policy with the FAFSA Simplification Act.
“Denying students aid based on a prior drug conviction reduces the chance that they can benefit from higher education and has severe negative implications for equity, given the disproportionate enforcement of drug-related offenses,” the letter states. “Furthermore, simplifying the higher education tax benefit process will help to improve the take-up of the benefit among students and families with low incomes.”
Publication Date: 7/8/2022