Student loans are an indispensable pillar of the United States's system of higher education. Without student loans, higher education would be financially unattainable for millions of American students. As the cost of tuition continues to rise at the vast majority of educational institutions, the importance of student loans will continue to grow as well. Although the rise in higher-education costs is probably unsustainable in the long run, it remains possible thanks to the generosity of federally-backed loan providers and a robust backstop of private student lenders.
Student loans can be confusing for students, parents and educators alike. Whereas a given student hardly notices the loan payments that post directly to their university's general fund, he or she certainly pays attention to the loans that settle into his or her personal bank account.
These loans' funds are unambiguously earmarked for tuition, fees and general education-related expenses. However, the typical student may lump them in with the regular taxable income earned from a work-study job or part-time outside gig. Despite the fact that the bulk of these funds are destined to be sent on to the student's institution of higher education, they may be treated as discretionary income for immediate budgeting purposes.
This can be problematic. Although they usually don't begin to accrue interest until after their borrower has graduated or withdrawn from college, student loans must be repaid according to a strict timetable. In fact, student lenders are known as extremely unforgiving lenders. Student loans can't be forgiven in bankruptcy and are very difficult to settle for less than their face value.
Students who treat these loans as income may be setting themselves up for financial problems down the road. Since they're not counted as taxable income, student loans have no effect on their borrowers' annual income tax refunds. Students who expect otherwise may be unpleasantly surprised.
For tax purposes, the distinction between loan payments and stipends is crucial. Whereas student loans are not considered to be taxable income and have no appreciable impact on their borrowers' tax calculations, the stipends paid out by graduate and Ph.D programs are taxable. Since they don't accrue interest and don't need to be repaid, these monies count as regular income for their recipients. Whereas loans are designed to subsidize the actual costs of education, stipends are intended to subsidize advanced-degree students' living costs. They exist to discourage these students from seeking part-time work.