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College Student Aid: Another Tax-Free Benefit of the CARES Act

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Students who receive emergency financial aid courtesy of the Coronavirus Aid, Relief and Economic Security (CARES) Act will not have to pay income tax on that aid, according to Mark Kantrowitz, publisher and vice president of research, at Savingforcollege.com.

That aid will be considered necessary relief as the result of a qualified disaster, which is excluded from a taxpayer’s gross income under Section 139 of the U.S. tax code, says Kantrowitz. He explains that since President Donald Trump declared a national emergency on March 13, invoking the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the current health emergency is considered a qualified disaster.

It should be noted that the IRS has not issued any press release on the tax treatment of emergency financial aid provided to colleges and universities in the CARES Act, but Kantrowitz, an expert in all things student financial aid-related, says his sources in the federal government confirm this interpretation. Other benefits included in the CARES Act, such as the $1,200 payment to adults with an adjusted gross income up to $75,000 ($150,000 for couples) are also tax-free. (Americans 17 and older who are dependents on someone else’s tax return don’t qualify for these payments.)

(Related: 8 Ways the Stimulus Package Helps Student Loan Borrowers)

The $2.2 trillion CARES Act provides $14 billion in assistance to colleges and universities, at least half of which must be used for emergency financial aid for undergraduate and graduate students in need “to help cover expenses related to the disruption of campus operations due to coronavirus,” according to a letter from Betsy DeVos, secretary of education, to college and university presidents. Those students could receive up to the maximum allowed under the federal Pell Grant program, which is $6,195 for the current academic year.

DeVos asks that college and university leaders prioritize students with the greatest need and if they find there is not a “significant financial need at this time” for their students, they consider donating their allocation to other institutions in their state or region. Higher ed institutions will receive these emergency funds based on a formula using their student enrollment number.

Meanwhile, Rep. Carolyn Maloney, D-N.Y., said she plans to introduce a bill, the Student Debt Forgiveness for Frontline Health Care Workers Act, that would eliminate graduate school debt for health care workers who are providing direct patient care in response to the COVID-19 pandemic. The relief would apply to nurses, doctors and other health care professionals who have been treating COVID-19 patients and are still paying off their student loans, whether they are recent graduates or more experienced providers.

Front-line health care workers are “not immune to the economic consequences that have already affected workers in all sectors as a result of this public health crisis,” said Maloney in a statement. “This would be a significant step toward strengthening the health care system during the COVID-19 response and beyond by investing in essential personnel.” 

— Check out 8 Ways the Stimulus Package Helps Student Loan Borrowers on ThinkAdvisor.