Student management

Student Loans: How to Remove Unemployment Benefits from Your Income When Applying for College Financial Aid

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If you are applying for college financial aid, you should be sure to remove unemployment benefits from your income to ensure the highest aid available. This could be tricky due to the confusion around tax filings and the financial aid application process.

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As The New York Times reported, unemployment benefits are generally considered income when calculating a student’s eligibility for financial aid. But as part of COVID-19 relief packages, the US government allowed Americans earning less than $150,000 a year to exclude unemployment benefits up to $10,200 per recipient from their 2020 taxable income.

The potential problem lies with the Free Application for Federal Student Aid (FAFSA), which students and their families fill out to apply for financial aid. The FAFSA form is what you need to receive federal Pell grants and need-based student loans. States and colleges also use it to award their own financial aid.

The FAFSA for the 2022-23 academic year became available on October 1, 2021 and uses financial information from the 2020 tax year. Income for the 2020 tax year is generally reported on 2021 tax returns. .

This is where the confusion comes in. The federal relief effort that excluded unemployment benefits did not take effect until March 11, 2021 — after many people had already filed their 2020 tax returns and reported their unemployment benefits as income.

The IRS said it would automatically make corrections to taxpayers who had already filed tax returns and send them refunds if needed. However, there could still be issues involving first time filers who also use the IRS data retrieval tool to complete the FAFSA form. This tool allows FAFSA applicants to quickly transfer encrypted tax information into the online financial aid form, and students and families are encouraged to use it.

But because the tool transfers information from the original filings, data from early filers who did not claim the unemployment exemption will not reflect the IRS adjusted lower income. In the fall of 2021, the Federal Office of Student Aid issued a notice stating that early filers who used the data tool for the FAFSA would have higher reported income, which could reduce their eligibility for the federal assistance as needed.

Meanwhile, the IRS has warned FAFSA filers not to use the data tool if they file their 2020 tax returns and do not exclude any unemployment benefits from their earnings.

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So what can you do? If you had unemployment income in 2020 and you filed your tax return before March 11, 2021, you should contact your college’s financial aid office to have unemployment benefits removed from your income on the FAFSA .

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has won awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.