ACE, Other Associations Support Tax-Free Pell Grant Act
May 08, 2023

​ACE and 19 other higher education associations are “strongly endorsing” the Tax-Free Pell Grant Act (H.R. 3000), which would repeal the taxability of Pell Grants and help hundreds of thousands of low-income Pell Grant recipients access the American Opportunity Tax Credit (AOTC).

In a letter to the bill’s primary sponsors, Reps. Lloyd Doggett (D-TX) and Mike Kelly (R-PA), the groups write that their bill both advances efforts to simplify the tax code while allowing low-income students to get more much-needed financial aid. Doggett, ranking member of the House Ways and Means Subcommittee on Health, and Kelly, chair of the House Ways and Means Subcommittee on Tax, introduced the bill in the House on April 28.  

Since 1986, Pell Grants used for non-tuition costs like room and board have been taxed as a form of unearned income. The impact of scholarship and grant aid taxability has grown over the past 35 years as the cost of non-tuition higher education expenses has risen so that now approximately 3 million students receive aid that is subject to taxation.

A grant/scholarship offset clause in the AOTC mandates that applicants deduct their Pell Grant from the eligible expenses covered by the credit, such as tuition, fees, and course materials. They can claim the AOTC if they know to use their Pell Grant to cover non-tuition expenses like room and board, but then that portion of their Pell Grant would be taxable.

The Tax-Free Pell Grant Act also expands the AOTC and the Lifetime Learning Credit to include essential student expenses like dependent care and computers. These costs, which are often a hurdle for low-income students trying to balance college with other responsibilities, are covered by direct federal financial aid programs like Pell and should also be part of higher education tax credits, the associations said.