Bipartisan Proposal Would Make Pell Grants Tax-Exempt
Credit: Bill Clark / CQ-Roll Call, Inc. / Getty Images- A bipartisan coalition of four representatives introduced the Tax-Free Pell Grant Act.
- If passed, the measure would make Pell Grant funds used on living expenses tax-exempt.
- The bill would be particularly helpful for community college students.
- Lawmakers may choose to include the measure in a soon-to-come budget proposal.
Pell Grant recipients could be eligible for larger tax refunds if Congress passes a recently introduced bipartisan bill.
Four U.S. House of Representatives members, including two Democrats and two Republicans, introduced the Tax-Free Pell Grant Act on April 1. If passed, the measure would make leftover Pell Grant funds used to cover living expenses while in college tax-exempt.
Rep. Lloyd Doggett of Texas is the bill’s primary sponsor in the House.
“Everyone deserves a chance at success,” Doggett said in a statement, “and we should be simplifying our tax code to unlock more support for students interested in going to college but who may need a little financial help to get there.”
Looking for more info on Pell Grants and Federal Financial Aid? Read More:
Clare McCann, managing director of policy and operations at the Postsecondary Education & Economics Research (PEER) Center, told BestColleges that this measure would essentially put money back in the pockets of Pell Grant recipients. Currently, Pell Grant funds received by students that don’t go toward tuition and fees are seen as taxable income.
The Tax-Free Pell Grant Act would mean students don’t have to pay taxes on Pell Grants received if they use that money on expenses like housing and childcare.
“What this bill is trying to do is clean up that mess for students and make sure their federal aid is not also going back to the government,” McCann said.
She explained that Pell Grant funds are primarily meant for tuition and fees. However, in instances where other financial aid covers tuition and fees and Pell Grant funds are left over, students are refunded the leftover funds to pay for indirect college expenses.
This tends to apply most often to community college students due to lower tuition and low-income students who receive larger Pell Grants.
“Community college students will stand to benefit the most from this proposal,” McCann said.
It’s unclear how much in taxes students can expect to save if this bill is passed.
The American Association of Community Colleges estimates the bill will cost the federal government $1.9 billion over the next decade, which amounts to approximately $190 million in savings for college students each year.
The Tax-Free Pell Grant Act would also allow Pell Grant recipients to make full use of the American Opportunity Tax Credit (AOTC). This tax credit allows students to request tax refunds for educational expenses, but any Pell Grant funds refunded to students are currently deducted from the AOTC allowance.
If passed, the bill would exempt Pell Grant refunds from the AOTC calculation.
“In my district, relatively few taxpayers use the AOTC because many attend community colleges and can’t claim their childcare and computer costs,” co-sponsor Rep. Danny Davis of Illinois said in a statement. “Ensuring that students can fully benefit from the AOTC credit without worry about being taxed on the Pell Grant helps educate our citizenry and strengthen them economically.”
Doggett introduced earlier versions of this bill in 2021 and 2023; both failed to clear the House of Representatives.
McCann said the bipartisan measure could make its way into a future budget proposal through the upcoming reconciliation process in Congress. Lawmakers are already considering sweeping changes to the country’s tax code, so now would be a logical time to enact the bulk of the Tax-Free Pell Grant Act.