Education

I'm guessing this was reported on 1099-MISC. 

The reason for the difference in tax is that if it is like her work, it is taxed as Self-Employment and she pays Self-Employment (FICA / Social Security) tax.

If it is not like her work, she only pays INCOME tax. 

The fact that she used it to pay off school loans has no bearing on the type of income and/or tax unless it was granted with the stipulation that it be used to pay off student loans (which it wasn't) 

The real question is, was this income payment for services or something else? 

I understand this was for services she provided in 2022, but the payment was made in 2023. 

Did the student receive a 2022 W-2 for services she performed in 2022?  

If yes, I would ASSUME that this 9,600 would have been included in Box 1 on her W-2  (if it had been finalized in 2022) and therefore WOULD be subject to Self-Employment tax. 

ON THE OTHERHAND if this is considered a "Scholarship / Grant" (and the State of Michigan seems to refer to it this way), you could handle it like a school grant and pay only Income tax by answering "No" to the questions about work. 

If this was reported on a 1098-T, you would enter the 1098-T and the income would flow properly to Schedule 1, but it doesn't sound like this was the form they used. 

You'll need to contact the school where she taught to ask how they are reporting the income for active student teachers, as W-2 income (you'd answer YES to work and FICA tax charged) or 1099-MISC (you could answer NO to work and FICA tax not charged) 

According to the IRS:

“A scholarship or fellowship grant is generally taxable compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. These include amounts paid to you to aid you in the pursuit of graduate or postdoctoral study and included in your gross income under the rules discussed in this chapter. Taxable amounts not reported to you on Form W-2 are generally included in gross income as discussed later under Reporting Scholarships and Fellowship Grants.”

“Include any taxable amount not reported to you in box 1 of Form W-2 on Schedule 1 (Form 1040), line 8r.”