When colleges and universities calculate their total cost of attendance, they include more than just tuition costs. The total cost of attendance includes tuition, fees, and room and board. Financial aid awards are based on the total cost of attendance. So you can use any extra student loan money to help pay your living expenses.
Although you may use it as income, however, it is not considered a source of income. Read on for a closer look at how the IRS, lenders, and landlords see your student loans.
Do Student Loans Count as Income?
Lenders disburse the funds for student loans to the college or university. The financial aid office then disburses anything in excess of the semester tuition and fees to the student. At that point, the student can use the remaining student loan fees for living expenses or any other purpose.
The funds, however, are not considered a source of taxable income. That’s because it is a debt obligation that must be repaid.
Are Student Loans Taxable Income?
The IRS does not consider the proceeds from student loans as income, so you do not need to claim them as income on your taxes. While you are in school full-time and receiving student loan support, you may not need to worry about reporting anything about those loans on your tax returns.
You should, however, remember to include information about your student loans on your taxes once you start making payments on the loans. At least some of the interest you pay on your student loans every year is tax deductible, which means it reduces your federal tax burden.
The only time that student loan debt must be reported as income is when the debt is forgiven instead of being repaid. When your student loans are forgiven, someone else is essentially paying them off for you and is therefore in most cases still considered a form of taxable income.
Qualifying for a Loan
Even if you are currently receiving funds for living expenses from student loans, they are considered a debt obligation rather than a source of income. So, in most cases, you can’t claim that as part of your monthly income on a loan application. You do, however, need to claim the student loans as a debt obligation.
The applicant’s debt-to-income ratio is one of the factors lenders use when evaluating a loan application. Your debt-to-income ratio is the ratio of your monthly debt obligations divided by your gross monthly income.
Student loan debt affects the debt portion of that equation rather than the income portion. If you are a full-time student and your student loan payments are deferred, the impact on your debt-to-income ratio can be minimal. You might only be required to pay the accrued interest on your loan if anything at all. Once you start making payments on your student loan, however, that entire monthly payment is part of your total monthly debt obligation.
Borrowers with higher debt-to-income ratios are considered a higher risk than borrowers with lower debt-to-income ratios. So your debt-to-income ratio impacts how much money you can borrow for a mortgage or a car loan as well as whether you get approved for a loan at all.
Qualifying to Rent an Apartment
Although students may use the proceeds from their student loans to pay for their apartment rent, it does not qualify as income on a rental application. Although requirements will vary depending on the landlord, typically the only source of income you will be able to claim for an apartment rental is employment income that you can verify with a pay stub or an income tax return. If you don’t have any verifiable income other than your student loan, you’ll likely need to get a parent to co-sign your apartment rental application.
Once you are out of school and begin repaying your student loan obligation, the debt can actually hurt your chances of getting an apartment. Typically, a landlord will evaluate the information on your application along with your credit score and credit report. They will also look at your total monthly debt obligations relative to your monthly income and evaluate whether you’ll be able to make your monthly rent payments.
If you have a lot of student loan debt (or other debt like credit cards and car loans), you have less money available every month to pay for housing. Student loans and other forms of debt can also prevent you from getting an apartment after graduation without a co-signer.
Students can use excess proceeds from their student loans to pay for living expenses like rent or car loans. They typically cannot, however, claim student loan funds as income on their loan or apartment application. Similarly, you don’t need to claim student loan money as income on your tax return. Although student loans can be used as a source of income while you are in school, they are ultimately a debt obligation that you will have to repay in the future.
Author: Kimberly Goodwin, PhD
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