Taxes, student loans, & the Segal Americorps Education Award

Tax season is in full swing and today I decided to have my taxes prepared.

(For folks in the Seattle area, United Way of King County has an awesome free tax preparation program that I’ve used the last two years.)

The unpleasant realization that I owe money to the government brings up a related (in my mind at least) topic: the Segal Americorps Education Award.

For those of you who are unfamiliar, each person who completes an Americorps program receives this monetary award which can be used to further one’s education or pay back student loans.

I participated in an awesome Americorps program called Public Allies back in 2010/2011. I learned A LOT and had a really fantastic experience overall, but the year was definitely challenging. There’s a reason that Americorps is described as a year of service (and why members are referred to as volunteers): I worked well over full time while earning barely enough to get by. I was happy to do so and still believe that the experience I gained and the people I served made my time worthwhile–and the Ed Award was certainly a great benefit to completing the program.

Like many others, I completed my Bachelor’s degree prior to joining Americorps and planned to use my award to pay back student loans. As it turns out, only “qualified” loans are eligible to be paid back with the Ed Award. For me that meant I could only use the funds to pay on my federal loans–which make up only about 30% of my loans–the rest are ineligible private student loans.

I shrugged off my disappointment (that’s what I get for not reading the fine print) and went through the online disbursement process each month to have $275 of my $700 in monthly  payments covered by my award.

It wasn’t until the end of 2011 when I received a 1099-MISC documenting a little over $2,000 in miscellaneous income from Americorps that I began to do some further research.

According to the Americorps website the Ed Award, “unlike most other forms of scholarships and fellowships, is subject to federal tax in the year the payment is made. It is considered taxable income regardless of whether it’s used for current educational expenses or to repay a qualified student loan.”

So, in short, an Americorps member dedicates a year of their life as a volunteer. As a benefit of their service they receive a monetary award to invest in their (past or future) education. There are strict guidelines on how this award can be spent and it is considered taxable income, even when it’s disbursed according to the award guidelines.

In my mind the tax obligations would make more sense if the award was a cash pay-out with no restrictions–truly just income.

These guidelines seems particularly irrational since the maximum amount set for the Ed Award each year  is based on the maximum value of federal Pell Grants which are NOT considered taxable income if used on qualified educational expenses.

In my personal situation this all amounts to my being granted money to pay student loans; then finding out I can only use the money (which I received from the federal government) to pay back loans I took out from the federal government; and, finally, finding out I have to pay federal taxes on the money I was given from the federal government to pay back loans I owe to the federal government.

…and suddenly I’m a character in a Monty Python sketch.

This “miscellaneous income” also put me just over my expected tax obligation–making me owe money rather than receive my much-anticipated tax refund.

At a time when half of recent college graduates are unemployed or underemployed, and student loan forgiveness is a hot topic as a tool for economic stimulus, removing the income tax obligation from the Segal Americorps Education Award seems like a small, logical change.

Until then, though, the IRS can expect my check for $124 prior to April 15th.