What Is Combat Pay for FAFSA and How Is It Treated?

The Free Application for Federal Student Aid (FAFSA) collects financial information to determine a student’s eligibility for federal and state financial aid programs, including grants, scholarships, work-study, and federal student loans. Understanding how different income sources are treated on the FAFSA is important for military service members and their families. Military compensation, specifically combat pay, has unique considerations when completing this financial aid application.

Types of Combat Pay for FAFSA Purposes

Combat pay is a specific type of compensation provided to active members of the U.S. Armed Services serving in designated hazardous zones. This pay is distinct from a service member’s regular base pay and is for those exposed to hostile conditions or deployed to areas officially designated as combat zones.

Two primary categories of combat pay are Hostile Fire Pay (HFP) and Imminent Danger Pay (IDP). HFP is awarded when a service member is subjected to hostile fire, explosion of a hostile mine, or other hostile actions. IDP applies when a service member is on duty in a designated area where there is a threat of physical harm due to civil unrest, war, or terrorism. A service member cannot receive both HFP and IDP for the same month. The monthly rate for both HFP and IDP is typically $225.

The Combat Zone Tax Exclusion (CZTE) allows certain military pay earned in a designated combat zone to be excluded from federal taxable income. This exclusion applies to various forms of pay earned while serving in these zones, including basic pay, HFP, IDP, reenlistment bonuses, and pay for accrued, unused leave.

Treatment of Combat Pay on FAFSA

Despite typically being excluded from federal taxable income, combat pay is generally considered when determining a student’s eligibility for federal financial aid through the FAFSA. The Department of Education’s methodology for calculating financial aid, which now uses the Student Aid Index (SAI) instead of the Expected Family Contribution (EFC), factors in various income sources. This calculation assesses a family’s financial strength and their ability to contribute to educational costs.

For enlisted persons and warrant officers, all combat pay is considered nontaxable and typically not included in their Adjusted Gross Income (AGI) on their tax return. For commissioned officers, there can be a taxable portion of combat pay. This taxable amount is the portion that exceeds the highest enlisted person’s pay, plus any HFP or IDP. The untaxed portion of combat pay, for both enlisted and officers, is generally treated as untaxed income for FAFSA purposes.

The inclusion of untaxed combat pay as income can impact the SAI calculation, which in turn influences the amount of need-based aid a student may receive. However, for veterans, combat pay is explicitly not considered as income when calculating the SAI, which can lead to a lower SAI and potentially more need-based financial aid. Financial aid administrators can use professional judgment in certain circumstances, such as significant changes in a family’s financial situation, to adjust FAFSA data and potentially exclude combat pay from income calculations.

Reporting Combat Pay on the FAFSA Form

Accurately reporting combat pay on the FAFSA form requires attention to its taxability. For most service members, the untaxed portion of their combat pay will be indicated on their IRS Form W-2 in Box 12, typically with Code Q. This code signifies that the amount is nontaxable for federal income tax purposes. This untaxed amount should not be included in the Adjusted Gross Income (AGI) reported on the FAFSA.

On the FAFSA, untaxed combat pay is reported as untaxed income. Specifically, it is entered on Worksheet B of the FAFSA, which accounts for various untaxed income sources. It is important to avoid double-counting this income; if it was already included in the AGI, it should not be reported again as untaxed income.

For service members who did not file a tax return, combat pay should be reported as income earned from work, but not as untaxed income, to prevent it from being counted twice in the financial aid calculation. The FAFSA form includes specific questions for both students and parents regarding combat pay.

For enlisted persons and warrant officers, since their combat pay is entirely nontaxable, they typically report zero for combat pay that was included in their AGI. Commissioned officers, if they have a taxable portion of combat pay (the amount exceeding the highest enlisted pay plus HFP/IDP), should only report that taxable portion if it was included in their AGI. If there are any discrepancies or confusion, referring to IRS Publication 3, “Armed Forces’ Tax Guide,” can provide additional clarification on the taxability of military pay.