If your plan to pay for college or graduate school includes scholarships or grants—congratulations! You’re on the right track. You should always start with any free money you can find. Unlike federal and private student loans, scholarships and grants don’t need to be paid back. Here’s some general information about what scholarships and grants might mean for you when tax time comes around. Of course, you should check with a tax advisor if you have questions about your specific circumstances.
Note: Student loans may be eligible for tax credits and deductions.
Are scholarships taxable income?
A scholarship may not be subject to tax if these two conditions are met:footnote 1
- You're a candidate for a degree at an eligible educational institution that maintains a regular faculty and curriculum, and which normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.
In general, any scholarship funds that go toward tuition and course essentials may not be subject to tax. But here’s where things get a little tricky—nothing about paying for higher education could be that simple, right?
Scholarship funds may be taxable income when they’re used to pay for anything else.
Scholarship funds that may be taxable:footnote 1
- Amounts used for incidental expenses, such as room and board, travel, and optional equipment
- Amounts received as payments for teaching, researching, or other services required as a condition for receiving the scholarship
Are grants taxable?
Similar to scholarships, grants may not be subject to tax if you are a degree candidate at an eligible educational institution and use the funds to pay for qualified education expenses. However—you guessed it—there are important distinctions, according to the IRS.
Grant funds that may be taxable:footnote 1
- Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant
Get help from an expert
Of course, no one expects you to understand all the ins and outs of taxes. Even financial experts learn new things all the time. You should consult IRS Publication 970 “Tax Benefits for Higher Education” or a personal tax advisor for additional information.
Are scholarships and grants worth it?
Now that you know some of the factors needed for scholarships and grants to not be subject to tax, you might be wondering—are scholarships and grants worth it? The short answer: ABSOLUTELY!
In the 2021-22 academic year, scholarships and grants paid for 26% of all college costs!footnote 2
Grants are generally awarded based on need—you apply for them by filling out the Free Application for Federal Student Aid (FAFSA®). To be awarded scholarships, you need to apply for each one. There are scholarship opportunities out there for everyone. The idea that scholarships are only for straight-A students and all-star athletes is an outdated myth.
Plus, scholarships aren’t just for first-year college students. In fact, you can start applying for college scholarships even before high school, but especially in your junior year. Make sure you apply every year of college and graduate school.
When it comes to paying for college and graduate school—always think, “free money first.” But when tax time comes, do your due diligence in knowing what’s taxable income and what’s not.