Feenstra Introduces Legislation to Make Pell Grants Tax-Free

WASHINGTON, D.C. – Today, U.S. Rep. Randy Feenstra (R-Hull) introduced legislation – the Tax-Free Pell Grants Act – to make federal Pell Grants tax-free.

Specifically, this legislation expands the use of Pell Grants on a tax-free basis, improves coordination with the American Opportunity Tax Credit (AOTC), and ensures that students do not lose out on any AOTC benefits. Increasing compatibility with the AOTC ensures that Pell Grants are not treated as taxable income, even if they are used for non-tuition education expenses.

U.S. Reps. Lloyd Doggett (D-TX), Mike Kelly (R-PA), and Danny Davis (D-IL) are co-leads.

“I have long supported Pell Grants because they offer academic opportunities to our students and ensure that Iowans who might otherwise skip higher education because of the cost can pursue advanced studies. These grants are an important investment in the next generation of leaders, farmers, innovators, and entrepreneurs who will support our communities and power our economy forward,” said Rep. Feenstra. “However, current law still requires some students to pay taxes on their Pell Grants, reducing the financial support that these grants are intended to provide. That’s why I’m glad to help introduce legislation to make Pell Grants completely tax-free so that our kids can focus on their studies without worrying about the cost.”

While Pell Grant awards used to pay for tuition and fees are already treated as tax-free income, any portion of a Pell Grant used for other education-related items like living expenses is taxed. Currently, using Pell Grants to cover tuition reduces potential AOTC eligibility and creates complications for students in maximizing their educational benefits. As a result, many students simply forgo the AOTC, leaving an estimated hundreds of millions of dollars unclaimed each year. 

The AOTC covers up to $2,500 in annual college tuition, fees, and other education-related expenses — 40% of the credit, up to $1,000, is refundable. 

With more than 3 million undergraduate students in the United States being parents – nearly one in five college students – access to affordable childcare can be the difference between completing a degree program or not. The Tax-Free Pell Grants Act meets this need by adding childcare and computer costs as qualifying expenses for the AOTC.

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