Last week I wrote about the simple path anyone can follow in order to go to college for free (and explained why I think almost no one takes it).
Some commenters objected to the fact that in passing I mentioned the benefits of the income-based repayment option for loans made directly by the federal government, claiming that an education paid for with such loans wasn’t “really” free.
This seems like a deliberate misreading of my post, but since several people made the same objection, I thought I may as well explicitly clarify the issue.
It’s possible to go to college tuition-free
The second step I explained was to “Select institutions that promise to meet full demonstrated financial need.” If you’ve established FAFSA independence, and have a low income and assets during the period the FAFSA covers, meeting your full demonstrated financial need will cover your tuition and fees. Here’s the description of the California Blue and Gold Opportunity Plan:
“If you are eligible, your systemwide tuition and fees will be fully covered by scholarship or grant money.”
That means no tuition, no fees, no loans.
Grant aid covering room and board is taxed as ordinary income
When your grant aid (scholarships, fellowships, and any other grant that doesn’t need to be repaid) exceeds the amount your college charges in tuition and mandatory fees, the difference is taxable as ordinary income on line 7 of IRS Form 1040.
Maybe this is a good policy and maybe this is a bad policy, but the logic behind it is simple: the car you use to drive to work isn’t deductible as work travel, the meals you eat every day aren’t deductible as work meals, and your house or apartment payments aren’t deductible as work lodging just because you happen to have a job. The IRS isolates your expenditures directly connected to your business or job from those incidental to it, so even if you live in the same city as you work, your rent isn’t a work expense.
The same logic applies to the taxability of grant aid in excess of tuition and fees: you have to live somewhere, and you have to eat something, so grant aid covering room and board doesn’t cover “educational” expenses, it just covers expenses you’d have to pay anyway, and is therefore taxable income, not untaxed educational assistance.
Colleges don’t want to waste their grant aid
This makes colleges and universities extremely reluctant to spend their scarce grant aid covering room and board because the same amount of money goes further when distributed tax-free to cover other students’ tuition and fees. For a student in the 10% income tax bracket, $10,000 in grant aid only covers $9,000 of living expenses while it covers $10,000 in tuition and fees.
Don’t take out student loans if you don’t want to
If you want to save up money before going to college, or if you want to work enough while enrolled in order to cover your room and board out of current income, then you don’t have to take out student loans or any other kind of loan in order to sleep and eat.
But if you take out student loans, take out federal direct student loans
On the other hand, if you don’t have enough money saved up to pay for your room and board out of pocket, or if you don’t want to work enough hours while enrolled in order to cover your room and board, then federal direct student loans offer impossibly low interest rates and impossibly generous repayment terms.