The Tax-Free Pell Grant Act would refine and broaden how Pell Grants are treated for federal taxes. It would explicitly exclude Pell Grants from gross income, placing them on the same tax-free footing as other scholarship or fellowship amounts that are used for qualified tuition and related expenses. In addition, the bill would treat Pell Grants as non-adjusting for the purposes of the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC), meaning Pell Grants would not reduce the amount of these education credits. The changes would apply to tax years beginning after December 31, 2025. In short: under this bill, federal Pell Grants would be completely tax-free, and they would not affect the value of education credits, starting with 2026 tax years.
Key Points
- 1Expands the tax-free treatment of Pell Grants: Pell Grants would be excluded from gross income as a federal Pell Grant under the Higher Education Act, in addition to the general scholarship/fellowship exclusion for qualified expenses.
- 2Clarifies use for scholarships: traditional scholarships or fellowships still require that funds used for qualified tuition and related expenses be the basis for the exclusion.
- 3Pell Grants not counted against education credits: Pell Grants would not reduce the amount of the American Opportunity Credit or Lifetime Learning Credit.
- 4Effective date: the amendments apply to taxable years beginning after December 31, 2025 (i.e., starting in 2026).
- 5Sponsors and origin: introduced in the Senate on May 6, 2025, by Senators Whitehouse, Grassley, Tillis, and Wyden.