Can I Still Receive Financial Aid if I Owe Back Taxes to the IRS?

by Jodee Redmond ; Updated March 15, 2018
Happy graduates wearing their caps and gowns.

Owing the IRS money doesn’t have to be a barrier to receiving financial aid for college. As long as you are proactive about paying off your tax debt, you can still qualify for assistance.

Basic Eligibility Criteria for Financial Aid

In order to qualify for federal financial aid, you must meet the basic eligibility requirements:

  • Be a U.S. citizen or an eligible non-citizen
  • Have a Social Security number
  • Demonstrate financial need
  • Register with the Selective Service (if you are a male applicant aged 18-25)
  • Enroll or have been accepted as a regular student in an eligible educational program
  • Maintain good grades

You must be taking at least a half-course load (six credit hours per semester for undergraduate students, five credit hours per semester for graduate students) to retain your eligibility for financial aid. A three-quarter course load is considered nine credit hours for undergraduate students. Full-time students take 12 credit hours per semester as undergrads and nine credit hours in graduate school.

Anyone currently in default on a student loan is not eligible for further financial assistance. If paying off the defaulted loan in full is not feasible, loan rehabilitation or loan consolidation are options available to deal with the situation and restore eligibility for further financial aid. Talk to your lender about your options so that you can address the loan and move forward with plans to continue your education.

All money received from the financial assistance program must be used to pay for education-related expenses.

Losing Eligibility for Financial Aid When Owing Back Taxes

You can lose your eligibility for financial aid if your property has a judgment lien registered against it because of unpaid taxes. The IRS can put a lien against your house, car, any investments or other financial assets you have, and your personal items. The lien is the government's official claim that it has a legal interest in your property due to the unpaid debt.

To restore eligibility for financial aid, you have a couple of options. You can pay off the tax debt in full or make a payment arrangement with the IRS. If you are able to pay off the tax debt all at once, the IRS will release the lien within 30 days after the debt is paid. You should receive a letter confirming that the lien has been lifted.

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Make a Payment Agreement with the IRS

To avoid getting into a situation where the IRS can place a lien against your property, talk to the agency about your debt before it gets to that point. If you owe money for back taxes but are unable to pay, work out an agreement to pay in installments.

The IRS allows taxpayers to arrange payment agreements online if they owe $50,000 or less (including taxes, penalties and interest) and have filed all their tax returns. Pay outstanding taxes with a debit or credit card, money order or with automatic payments from a checking account. Payments can also be made by check.

Penalties and interest are added to the amount owing until the balance is paid in full. The IRS charges a set-up fee for payment agreements of 120 days or more. Low income taxpayers can apply for a discounted rate on their set-up fee by filling out Form 13844, Application for Reduced User Fee for Installment Payments.

You can go back to school if you owe money for income taxes. Make a budget that includes paying off your past income taxes, and you could still be eligible for financial aid.

About the Author

Jodee Redmond is a freelance writer, author, editor, blogger and award-winning Internet researcher. She is a graduate of Centennial College in Toronto who has been freelancing since 2000. Jodee has also worked as a tax consultant, in sales and was a legal assistant for a number of years.

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