Tax and Financial Aid Impact of the Coronavirus Recovery Rebate

Is the recovery rebate taxable? Will it affect your student’s eligibility for financial aid for college? What about emergency student financial aid?

Sometimes, the federal government gives with one hand while taking back with the other. This mostly does not appear to be one of those times. At least, with regard to government aid. But, some forms of assistance from non-government sources, such as colleges and universities, may be taxable and may have an impact on aid eligibility.

Is the Recovery Rebate Taxable?

Section 2201 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) adds a new section 6428 to the Internal Revenue Code of 1986 (IRC) to authorize payment of a recovery rebate, also known as stimulus checks.

The recovery rebate is worth up to $1,200 to eligible individuals and $2,400 to married eligible individuals who file a joint federal income tax return. The recovery rebate amount is reduced by 5 percent of adjusted gross income (AGI) above $75,000 ($150,000 for a joint return).

The recovery rebate also provides $500 per qualifying child. This amount is not subject to an income phaseout.

The recovery rebate is a tax credit for the 2020 tax year and the stimulus checks are an advance refund of this tax credit. The recovery rebate will be paid by direct deposit or by check.

The stimulus checks are based on information from 2019 federal income tax returns, including the taxpayer’s address and direct deposit information. If your address has changed after they filed their 2019 federal income tax return, they should file IRS Form 8822 to update your address with the IRS.

If the taxpayer’s income in 2020 is higher than in 2019, leading to a reduction in their eligibility for the recovery rebate, they will not have to return the excess funds.

People who would normally not file a tax return for 2019 because their income as under the tax filing threshold should nevertheless file a tax return anyway, just to get the stimulus check now. If they do not file a 2019 tax return now, and the federal government is not able to get the necessary information from other sources (e.g., Social Security Administration), they will be able to get the recovery rebate when they file a 2020 federal income tax return.

Since the stimulus checks are an advance refund of a tax credit, they do not represent taxable income to the recipient.

Do the Recovery Rebate and Emergency Aid Affect Aid Eligibility?

The recovery rebate and emergency financial aid funds from government sources do not affect the student’s eligibility for college financial aid. Emergency financial aid funds from other sources, however, may affect the student’s aid eligibility.

The CARES Act allows colleges to transfer unused Federal Work-Study funding into the Federal Supplemental Educational Opportunity Grant (FSEOG) program. Section 3504 of the CARES Act allows colleges to use FSEOG funding to award “emergency financial aid grants to assist undergraduate or graduate students for unexpected expenses and unmet financial need” up to the amount of the maximum Federal Pell Grant.

Section 18004 of the CARES Act establishes the Higher Education Emergency Relief Fund to provide about $14 billion in funding to colleges and universities. At least half of this money must be used to provide “emergency financial aid grants to students for expenses related to the disruption of campus operations due to coronavirus (including eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, health care, and child care).”

The CARES Act includes a special rule that the emergency financial aid grants to students under section 3504 of the CARES Act will not be treated as “other financial assistance” in the federal financial aid formula. There is no similar language in section 18004 of the CARES Act.

However, the U.S. Department of Education issued updated guidance on April 3, 2020 concerning the impact of the pandemic on higher education.

In particular, the guidance states that government emergency financial aid funds will not affect the recipient’s expected family contribution (EFC) and therefore will not affect eligibility for need-based financial aid.

Need Analysis

Any aid (in the form of grants or low-interest loans) received by victims of an emergency from a federal or state entity for the purpose of providing financial relief is not counted as income for calculating a family’s Expected Family Contribution (EFC) under the Federal Methodology or as estimated financial assistance for packaging purposes.

This applies to emergency financial aid funds provided in both sections 3504 and 18004 of the CARES Act, as well as the recovery rebate checks.

Only emergency financial aid funds from federal and state government sources are excluded from need analysis. Emergency financial aid funds from another sources, such as a college or university, still counts as estimated financial assistance (EFA) and will reduce the student’s eligibility for need-based financial aid.

In addition, scholarships and grants used for living expenses remain taxable.

Do Room and Board Refunds Reduce Aid Eligibility?

Room and board refunds will not affect the student’s eligibility for need-based financial aid during the current semester, but might affect aid eligibility next year if the refund is provided in the form of a credit or voucher for future college costs.

The U.S. Department of Education issued guidance on March 20, 2020 that specifies that a college is not required to change the student’s current cost of attendance and eligibility for federal student aid funds if the college provides a full or partial refund of room and board charges, tuition and fees or other institutional charges.

If the refund results in a credit balance in the student’s account, the college must disburse the credit balance to the student or parent within 14 days.

However, if the college issues this refund in the form of a credit or voucher toward charges in a subsequent academic term, the credit must be considered to be estimated financial assistance (EFA). This EFA will reduce the student’s eligibility for need-based financial aid during that term.