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Resources > FAFSA > What Is Income Tax on FAFSA? A Complete Guide

What Is Income Tax on FAFSA? A Complete Guide

The Free Application for Federal Student Aid (FAFSA) is an important aspect of every student’s academic journey—it allows you to easily access different resources that help you pursue your educational goals, including federal grants, scholarships, work-study funds, and loans.

When filling out the FAFSA, you’re required to provide your income tax information as it plays a vital role in determining your eligibility and the amount of aid you receive. So, what is income tax on FAFSA?

In this article, we’ll explain everything you need to know about FAFSA income tax, including how it affects your FAFSA application and how to report it accurately. You’ll also learn about the consequences of FAFSA fraud and the benefits of building and improving your credit profile early in life, as well as the ways to do that.

What Is Income Tax for FAFSA?

Income tax is a mandatory payment that the government imposes on people and businesses based on their income to fund public services. Income can include:

  • Wages
  • Salaries
  • Tips
  • Commissions
  • Bonuses
  • Rents
  • Royalties
  • Interest
  • Dividends
  • Capital gains

Income tax is one of the factors used to determine your Expected Family Contribution (EFC) on the FAFSA. Your EFC is a measure of your family’s financial strength, and it’s used to gauge how much financial aid you’re eligible to receive. 

The tax information that you report on the FAFSA is from your most recent federal income tax return—you’ll need to report your adjusted gross income (AGI), as well as any taxes paid and credits received.

Here are some additional details you need to know about FAFSA income tax:

  • Dependent students—If you’re a dependent student, you’ll need to report your parent’s income tax information
  • Independent students—If you’re an independent student, you’ll have to report your own income tax information
  • Taxes paid and credits received—You’ll need to report all of the taxes that you paid and the credits that you received on your most recent federal income tax return. This includes both federal and state taxes
  • Nontaxable income—You don’t need to report any nontaxable income on the FAFSA. This includes items like gifts, scholarships, and grants

How Is Your EFC Calculated Using Income Tax?

Your income tax information is used to calculate your EFC in a number of ways, with the AGI being the most important factor—the higher your AGI, the higher your EFC will be.

In addition to your AGI, the Department of Education also considers other factors when calculating your EFC, such as:

  • Your parents’ assets—These include assets such as your parents’ savings and investments. The more assets your parents have, the higher your EFC will be, which means that your family will be expected to contribute more money towards your education and vice versa
  • Your family size—The number of your family members is a significant factor too. The more people in your family, the lower your EFC will be
  • Your state of residence—The Department of Education also considers where you live when calculating your EFC. This is because some states have higher costs of living than others

How To Report Income Tax on FAFSA

The FAFSA uses income tax information from a specific period, known as the “base year,” to calculate your EFC. It’s typically two years prior to the academic year for which you’re applying for financial aid. For example, if you’re applying for the 2024–2025 academic year, you’ll be asked to report your income tax information for the 2022 tax year.

There are two ways to report your income tax information on the FAFSA—you can find more details in the following table:

MethodHow It Works
Manual entryYou can manually enter your income tax information from your tax forms. However, this method increases the risk of errors, which could delay your financial aid application or affect your eligibility
Automatic inputThe IRS Data Retrieval Tool (DRT) allows you to automatically transfer your income tax information directly from the IRS database. This is the easiest and most accurate way to report your income tax information on the FAFSA

Regardless of which method you choose, you’re ultimately responsible for the accuracy of your information. You should always double-check your FAFSA application before submitting it.

What Are the Consequences of Reporting Incorrect Income Tax on the FAFSA?

Reporting incorrect income tax information on your FAFSA can lead to several consequences, ranging from minor inconveniences to severe financial penalties. The two most common potential risks include:

  1. Being awarded inaccurate financial aid
  2. Experiencing legal issues

Being Awarded Inaccurate Financial Aid

Inaccurate income tax reporting can result in an inflated or deflated EFC, leading to either getting less aid than you’re entitled to or receiving aid you may not be eligible for, which could result in:

  1. Overpayment—If you receive excess financial aid based on an incorrect EFC, you may be required to repay it later, along with possible interest and penalties. What’s even worse, repaying financial aid due to inaccurate reporting can negatively impact your credit score, making it more difficult to secure credit in the future, including loans for housing, cars, or even future education expenses
  2. Delayed processing—If the Department of Education suspects discrepancies or inconsistencies in your income tax information, they may initiate a verification process. This can delay your financial aid award and potentially jeopardize your enrollment at your chosen institution
  3. Loss of eligibility—In severe cases, if the error is deemed intentional, you may lose eligibility for future financial aid, even if you correct the mistake later

Deliberate misrepresentation of income or assets or providing false information like names, Social Security number (SSN), or birth date on the FAFSA is considered fraud or even identity theft. The federal government can impose fines of up to $20,000 for knowingly providing false information on the FAFSA. In extreme cases, you may even face jail time for committing FAFSA fraud. Also, being caught misreporting information can damage your academic and professional reputation.

The severity of the legal repercussions depends on the intent behind providing incorrect information. Depending on whether it was a careless mistake, an honest misunderstanding, or a deliberate attempt to defraud the government, you can receive a different penalty.

Does the FAFSA Require a Credit Check?

No, the FAFSA itself doesn’t require a credit check. This means that you can access federal financial aid without having to worry about your credit score impacting your application.

However, some types of federal loans, such as the Direct PLUS Loan, do require a credit check. This loan is available to parents of dependent undergraduate students and graduate or professional students. Both the student and parent applying for the loan must have a good credit history. If your credit score falls below a certain threshold, you might be denied the loan altogether. Even with an acceptable credit score, a poor rating can lead to significantly higher interest rates on your loan. This is why it’s important to build and maintain a strong credit profile, even before you start applying for student loans.

Fortunately, leveraging a product like FreeKick can help you do just that.

FreeKick—Credit Building and Identity Protection (Coming Soon)

FreeKick, powered by Austin Capital Bank, provides a double dose of financial empowerment and security for your whole family. It helps teens and young adults build strong credit profiles and offers identity monitoring for up to two adult parents and six children under 25. Think of it as a safety net that also lays the groundwork for your future financial success.

Parent-Sponsored Credit Building and Credit Profile Monitoring

A strong credit profile can help you accumulate savings exceeding $200,000 over your lifetime, and FreeKick offers you an early beginning with parent-sponsored credit building for children aged 13 to 25.

While it’s often difficult for students to access credit options because of the CARD Act of 2009, FreeKick presents a solution that can significantly boost your financial future. Here’s how the process works:

  1. Create a FreeKick Account—Visit FreeKick.bank and select a preferred plan depending on your needs and budget
  2. Set It and Forget It—Once you activate credit building, FreeKick will work its magic by establishing a 12-month credit history for you. This is done through a special no-interest loan that uses your deposit to build your credit score
  3. Keep Growing—After a year, you and your parents can decide whether to continue building your credit with FreeKick or close the account and receive your initial deposit back

Identity Protection Services

Given that a child’s identity is stolen every 30 seconds, FreeKick provides a comprehensive array of features to protect both adults and children from ID theft. With the help of your parent, you can access all the services offered by FreeKick, including:

Services for Adult Children and ParentsServices for Minor Children
Credit profile monitoring
SSN monitoring
Dark web monitoring for personal information
Up to $1 million identity theft insurance
Full-service white-glove concierge credit restoration
Lost wallet protection
Court records monitoring
Change of address monitoring
Non-credit (Payday) loan monitoring
Free FICO® Score monthly
FICO® Score factors
Experian credit report monthly
Credit profile monitoring
SSN monitoring
Dark web monitoring for children’s personal information
Up to $1 million identity theft insurance
Full-service white-glove concierge credit restoration
Sex offender monitoring—based on sponsor parent’s address

FreeKick Pricing

Both FreeKick plans are FDIC-insured up to $250,000 and are designed to suit different family budgets:

FDIC-Insured Deposit AmountPlan Fee
$3,000$0 (Free)
$1$149/year

Protect your identity while avoiding the challenges college students face when applying for loans due to poor credit scores—sign up for FreeKick today.