Tax exemption for qualified education expenses using stipend instead of govement granted student loans

[aasuen11]

I am an MD/PhD student at a public university. During medical school training years, part of my tuition is covered by the school (via NIH grant funding) and the remaining portion is covered by me. I also receive an annual stipend from the school. I use government student loans that I take out and my stipend to cover the remaining portion of my tuition, other education expenses, and living expenses. In past years, my stipend was distributed monthly, I paid quarterly estimated taxes, and completed my tax return using a 1099-MISC provided by the graduate/medical school department. As of August 2021, I will be transitioned to a lump-sum stipend payment distributed at the beginning of each semester and the stipend will reported on a 1098T instead of a 1099MISC. My semester tuition is due prior to the distribution of my student loan. Usually, the school just has me wait until my loan is dispersed to pay tuition (this happens after the tuition is “past due” but they don’t charge me late fees). Now, that I have a lump-sum stipend coming at the beginning of each semester, I would like to use my stipend to pay off my tuition and then use my loan to pay for living expenses over the rest of the semester. As I see it, stipend monies used on tuition are considered tax exempt (because they were used for qualified education expenses) and loan monies used for living expenses are not taxed because, well,  they are loans. I want to know if this is a legally acceptable way to consider a major portion of my annual stipend as tax exempt. Or if government student loans must always be applied to tuition before any remaining balance can paid using stipend/income qualifying it as "tax-exempt" (even if the timing/due dates work out as I have outlined above).

[Hal_Al]

@aasuen11  said  "As I see it, stipend monies used on tuition are considered tax exempt (because they were used for qualified education expenses) and loan monies used for living expenses are not taxed because, well,  they are loans".

Q.  I want to know if this is a legally acceptable way to consider a major portion of my annual stipend as tax exempt.

A.  Yes. It's that simple.  Because the scholarship (stipend) is reported on a 1098-T, your "proof" is easier, if ever needed,  But even when the stipend was reported on a 1099-Misc, you were allowed to do that.  You can file amended returns to change past years, if beneficial.

Q. Must government student loans always be applied to tuition?

A. No. Borrowed money is your money and you can spend it or apply it, at tax time,  any way you want to. There is no  timing requirement for loan money.  Stipend (scholarship) money must, generally,  be applied to expenses in the year received. 

However, tuition paid with tax free scholarship money is not eligible for a tuition credit.  That's irrelevant  (for grad students) if you don't have enough taxable income to have a tax liability to take a credit against.

[Carl]

I just want to provide some clarification here.

Borrowed money is your money and you can spend it or apply it, at tax time, any way you want to

That statement depends on which side of things you're looking at and dealing with.  Generally speaking, borrowed money is not your money. It never was, is not now and never will be. Therefore, borrowed money is not reported on your tax return as income.

However, what you spend that borrowed money on very well may result in a reduction in the tax liability on the money that *is* your money. This thread is a good example of that. So long as the borrowed money is spent within the limits (if any) allowed by the loan agreement, then for tax credit and deduction purposes you treat it as your money. But for income reporting purposes, it's not your money and does not get reported as income on the tax return.

Eventually, you'll pay that money back using money that "is* your money to pay it back with a few years down the road.

*They who claim to understand the situation and all aspects of it, are obviously not paying attention.*

[M-MTax]

Generally speaking, borrowed money is not your money. It never was, is not now and never will be. Therefore, borrowed money is not reported on your tax return as income.

Nice philosophical argument but that's not why borrowed money is not reported on your tax return. It's not reported on your tax return because it must be repaid and therefore is not taxable income. No matter what a loan creates an asset in the form of the money received and also a liability in the form of a debt that must be repaid in terms of accounting principles.