How Tax Season Affects Your College Education - A Guide to Student Financial Aid

For better or worse, depending on who you are, tax season can be a stressful time. This includes those paying tuition and other costs associated with a college education. This particular blog is crafted to help both parents and students.  Today, we’d like to take the time to look through how tax season can work for you, paying you taxes while focusing on paying for college. Our job is to educate you on all things college planning, and to make sure you’re informed and confident this time of the year as the final half of a college semester begins.

In this blog, we will explore how tax season affects your college education by giving you a guide to student financial aid and more.

The Importance of FAFSA and Other Tax Information

So, why does tax season matter when it comes to FAFSA & financial aid?

It all relates to the connection that tax returns and financial aid have together, and just learning basic information about certain forms that you sign year in and year out, such as the W-2, 1098-T, and more.

Tax returns can help bring you forward in receiving financial aid eligibility. This isn’t just about filing your IRS return and maybe, just maybe getting a refund from it. This could lead to a common mistake people make when they sign up for the FAFSA. FAFSA is a free application to sign up for financial aid. One of the ways FAFSA will not grant you your eligibility is if there is misreported tax information. 

Need assistance with that? There is a GREAT tool that will help make sure all your information is as accurate as possible, and it’s called the IRS data retrieval tool. It gives access to the IRS tax return information you need, and as the official government student aid website outlines, if you’re eligible to use it, there are 3 big reasons why:

• It's the easiest way to provide your tax return information.

• It's the best way of ensuring that your FAFSA form has accurate tax information.

• You won't need to provide a copy of your or your parents' tax returns to your college.

Mistakes That Hurt Your Financial Aid

Misrepresenting your tax information on these forms is one big mistake, but other mistakes can also affect financial aid. Other information that should be put down is the correct tax year. FAFSA uses prior-prior year tax data, which is just a policy requiring tax information from two years before the academic year for which a student is applying. In this case, FAFSA would be using your 2023 tax return for the 2025–2026 school year.

It’s important that you also have a federal student aid ID. This would allow you to sign the FAFSA electronically. A federal student aid ID on studentaid.gov must be created by both the student and the parents. That directly impacts whether tax information can be put into it, depending on whether the parent or student is paying. 

Make sure you submit your taxes ON TIME! FAFSA, as a program, is going to expect a tax return, and if you don’t file your taxes on time, then your financial aid process can be stalled or, worse, rejected completely. It won’t be able to accurately assess your info if it’s not on time, since FAFSA needs official data from the IRS to acknowledge your income.

Tax Credits and Deductions

One of the final things to speak on is how tax credits and deductions factor into this process. Education tax benefits will be on the minds of parents and students as well. A few examples, like the American Opportunity Tax Credit or the Lifetime Learning Credit, will be what you might look into. The AOTC and LLC are tax credits that work to pay for qualified education expenses during a student's full 4 years.

Both of these tax credits can affect your overall attendance cost and other college expenses. They both also relate to something like a 1098-T, as we mentioned already. To be eligible to claim the AOTC or LLC, you must have received that form already. 

When it comes to deductions, you have the student loan interest deduction as something to use. This allows you to reduce your taxable income by up to $2,500 per year for interest paid on qualified higher education loans. 

Around this time of the year, along with it being tax season, it’s also scholarship season! That’s always a good thing, but does tax season hinder anything to do with what you earn from them? Thankfully, the answer is no, as the IRS considers scholarships a tax-free benefit, and the amount received will not be taxed. 

There are conditions to this, of course, and we recommend you read more into it on the official IRS website, along with all the other information we talked about in this blog. We know you will have many questions about this topic, and we want to help you through this process. Visit our website to learn more about FAFSA, be sure to sign up for our Young Achievers Scholarship, and reach out through our contact form.

College Financial Aid FAQ

Why does tax season matter to my college financial aid?

Tax season is a big deal because the information reported on your federal tax returns is directly used to determine your eligibility for student aid through programs like FAFSA. It relies on accurately filing your tax information and submitting the correct forms. Often, you will see mistakes being made, like how you report on your income, using the wrong tax year, or failing to file on time. Ensuring that both students and parents understand how the process works can prevent setbacks during an already busy time of year.