What are the tax implications of a college student placing some financial aid funds into a high-interest savings account?

by Michael G. Radich, CPA, MST | Aug 21, 2019

I am a college student who is receiving financial aid. After all of my school expenses are taken care of, I will have between $8,000 and $11,000 for my "living expenses," such as food, transportation, etc. If I open up a savings account that earns 2% interest and place this "borrowed" money into the account to earn interest while simultaneously using the loans throughout the year, would I need to pay any taxes or file a tax return? I figured that with this amount of money, since I will not be using it all at once, that I could place it in a high-interest savings account, but I am unsure of any tax implications. 

As a college student, you do not have to file an income tax return if you earn an income of less than $12,000. On an account that has a balance of $11,000 at a 2% rate, you would earn $220 of interest income. If some of your financial aid includes a work study, or you work part-time, that could change things, particularly if the jobs withhold federal income tax.

I would recommend that you work part-time for living expenses rather than keep excess aid in a savings account. Depending on whether or not the loan you have is subsidized, you may be accruing interest expenses of 4% (estimated rate) to make 2% interest. A new 2019 study also links working in college with higher earnings post-college. Working as little as 15 hours a week may significantly boost future earning power.

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Answered by: Michael G. Radich, CPA, MST, is managing shareholder with MGR CPA & Consultants PC in Pittsburgh.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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