Do your student loans or financial aid count as income when you complete an application for government benefits or any form of credit? There is a more important set of questions.
How do lenders classify the amount you owe when evaluating an application? How do government benefit programs classify any unspent funds at the beginning of a semester?
Lenders consider student loans as debt, which affects eligibility. Government entitlement programs consider any excess funding as a measurable resource, which also affects eligibility. Work through the issues in three sections.
- How lenders classify student loans as debt rather than earnings
- How IRS rules and child support guidelines affect entitlement eligibility
- What government entitlement programs consider as measurable assets
Count as Income & Debts on Credit Applications
Student loans and financial aid count as income on credit applications in very rare cases. More importantly, lenders will classify the loan proceeds as debt, which they bake into their debt-to-income ratio – an important underwriting criterion.
Student loans appear on your credit report and affect your score. Scholarships, grants, and work-study programs do not. Keep these distinctions in mind when completing an application for a home loan, credit card, car loan, or an apartment rental.
Banks do not count student loans as income on a credit card application. They classify it as debt that you must repay. The future monthly payments on these obligations affect your ability to qualify for a new account and could reduce the credit limit they grant. The amount of money you must dedicate each month towards the principal and interest influences your ability to pay your credit card bill on time.
The credit card companies will classify student financial aid such as stipends, grants, scholarships, and money earned by working as income. They may consider the portion of these sources that do not cover coursework (tuition, fees, required textbooks, etc.) that you can use for living expenses.
Auto finances companies do not count student loans as income on car loan applications. They also classify the proceeds as debt and bake future payments into your debt-to-income (DTI) ratio. The DTI ratio often determines the amount of money you can borrow to purchase a car.
Mortgage & Home Loans
Mortgage lenders will not count student loan proceeds on a home loan application. They will classify the money as debt, which acts as an offset to income. Most mortgage lenders calculate two sets of debt-to-income ratios.
- Front-end DTI includes the mortgage principal & interest, real estate taxes, and home ownership payments.
- Back-end DTI includes the monthly payments for all obligations including student loans.
Mortgage lenders may consider student financial aid on a home loan application, but it will not carry much weight. A typical mortgage term lasts thirty years. After graduation, scholarships, grants, and work-study programs do not help you make the monthly payments.
Student loan proceeds and financial aid may count as income on an apartment rental application. It mostly depends on the type of unit you want to rent: on-campus dormitory, or an off-campus apartment.
Many forms of student financial aid have specific use limitations. For example, you could win a scholarship or grant that covers tuition, fees, and required textbooks – but not housing. Others will allow you to pay for an on-campus dorm room. Read your award letter carefully.
You can use student loan proceeds to pay for on-campus rental housing. Most universities recognize that students have limited earnings while attending college, and you need this assistance to pay for dorm living.
You can use your student loan to pay for off-campus rental apartments. Many colleges will reimburse unused proceeds back to the individual. If you borrow more than the tuition costs, you may have a surplus. You can then utilize these amounts to cover off-campus rental costs.
The off-campus apartment management company may also require a continuing parental or sponsor guarantee as part of the rental application. This signed and notarized letter guarantees payment by a responsible third party.
It may be more difficult to use scholarships and grants for off-campus rentals, as these units are not affiliated with your college or university.
Count as Income for Tax & Child Support Purposes
Before looking at your eligibility for specific government entitlement programs, we need to lay some groundwork. Review the classification of student loans and financial aid as income for two distinct purposes.
The nationwide IRS regulations and state-by-state child support guidelines will both play an important role in your qualifications.
When Filing Taxes
Student loans and financial aid count for income tax purposes in very distinct ways. When filing your taxes you complete the IRS form 1040, which contains three different definitions.
- Total income (line 22) most frequently equates to gross on benefit programs
- Adjusted gross income (line 37) is calculated after making certain adjustments
- Taxable income (line 43) is calculated after taking general and itemized deductions
Here is a good rule of thumb. The IRS is the final arbiter of what constitutes income. Therefore, any source of money included in the total calculation should apply to other government benefit programs as well, which often ask for the gross.
- Grants and scholarships contribute to total income when used to cover room and board, and other expenses not required for coursework.
- Awards spent on tuition, fees, textbooks and other coursework related materials do not.
- Work-study awards increase total income. The school files a W2 statement.
- Student loan proceeds do not increment total annual income.
- Student loan interest (line 33) that you pay during the repayment phase may reduce your adjusted gross income.
- Forgiven student loan balances increase total annual income.
Many tax credits phase out above certain earnings levels. Keep these general rules in mind as you assess whether these programs affect your eligibility for tax credits. Consult your accountant for precise advice.
Student loans and financial aid count as income for child support purposes in a very different manner. Each state publishes its own rules. Individual judges make the final determination. There is no nationwide standard.
Below are some common threads that could apply in your state.
- Student loan proceeds and payments should not affect child support payments.
- Child support cannot garnish student loan money
- Forgiven student loan balance could influence child support amounts temporarily.
- Scholarships and grants could affect child support payments for the amounts above the direct cost of coursework (tuition, fees, required textbooks, etc.)
Then apply these two concepts evenly across all states when applying for any government entitlement program.
- The person paying child support reduces his or her gross earnings.
- The person receiving child support increases his or her gross earnings.
Count as Income & Assets on Government Benefit Applications
Student loans and financial aid are sometimes classified as income on government benefit applications. They can also increment assets (resources) if you deposit any unspent funds into your bank account in order to finance future education expenses.
Many government entitlement programs also contain resource limits. Unspent funds could make you ineligible in the months that the amount exceeds the resource limit. Therefore, you need to pay close attention to both aspects of this issue. You will find this general pattern within each program.
- Income calculations consistently follow the IRS rules and child support guidelines noted above and apply evenly across the states.
- Asset calculations are different for each entitlement program and sometimes do not apply in certain states.
Using these two patterns, we can now make an educated guess as to how student loans, scholarships, and grants affect eligibility for Food Stamps, SSI, Medicaid, Obamacare, Welfare, and Section 8 housing.
Food Stamps – SNAP
Student loans or financial aid count as income when applying for food stamps to the extent already noted. The SNAP (Supplemental Nutrition Assistance Program) is the government program more commonly known as food stamps.
As of December 2016, SNAP benefits programs have resource limits in sixteen states. SNAP-eligible households may have $2,250 in measurable resources, such as a bank account, or $3,250 in measurable resources if at least one person is age 60 or older, or is disabled.
SSI (Supplemental Security Income)
In a similar manner, student loans or financial aid can count towards income when applying for SSI (Supplemental Security Income). SSI provides monetary support for citizens and certain aliens who are age 65 and older, blind, or disabled and have limited earnings and assets.
SSI also has resources limits, which applies nationwide. The SSI resource limits are $2,000 for an individual and $3,000 for a couple and include the following assets.
- Bank accounts, stocks, U.S. savings bonds
- Personal property
- Life insurance
In the same fashion, student loans and financial aid count as income when applying for Medicaid. Medicaid is a joint federal and state program that, together with the Children Health Insurance Program, provides health coverage to children, pregnant women, parents, seniors, and individuals with disabilities.
The Medicaid resource limits are very confusing because of the expansion program under the Affordable Care Act.
- The 31 expansion states (as of December 2016) do not have resource limitations for health insurance coverage for younger populations.
- The 19 non-expansion state (as of December 2016) retained resource limitations for health insurance coverage for younger populations.
- All states retained resource limits for seniors needing long-term care and nursing home convalescence.
In a similar fashion, student loans and financial aid count towards income under Obamacare (Affordable Care Act or ACA) when applying for individual health insurance through a state exchange. The ACA provides premium and cost-sharing subsidies for people who earn too much to qualify for Medicaid.
The ACA does not impose a resource limit on individual plans bought on the state exchange. This rule applies evenly nationwide regardless of the Medicaid expansion status in each state.
Welfare – TANF
In a similar fashion, student loans and financial aid count towards income on your Welfare or TANF (Temporary Assistance for Needy Families) application. TANF helps needy families achieve self-sufficiency. States receive block grants to design and operate programs to accomplish four purposes.
- Help families care for children in their own homes
- Reduce the dependency by promoting job preparation, work, and marriage
- Prevent and reduce the incidence of out-of-wedlock pregnancies
- Encourage the formation and maintenance of two-parent families
As of December 2016, eight states have eliminated resource requirements for TANF. They remain in the forty-two other states.
Section 8 Housing Benefits
In a similar fashion, student loans and financial aid count as income on your public housing benefit application. The Housing & Urban Development Department oversees three federal housing assistance programs.
- Housing Choice Voucher Program (HCV or Section 8)
- Project-based rental assistance
- Public housing
The federal housing assistance programs do not have resource limits. However, the programs do impute income from assets that exceed $5,000. As of December 2016, the passbook interest rate applied to these balance is under 2%.