icon_marketing_blogFinance_20x20.svg Personal finance  |  December 23, 2021  |  Rob Zodda

Are Scholarships & Grants Taxable?

What you’ll learn
  • Potential tax benefits of scholarships and grants

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 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.

Are scholarships taxable income?

Good news! Those scholarships you worked so hard may not be subject to tax. The Internal Revenue Service (IRS), provides information as to what scholarship amounts may not be subject to tax, and amounts that may be subject to tax. 

A scholarship may not be subject to tax if:1
  • You're a candidate for a degree at an eligible educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
  • 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: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 education 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: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 in’s and out’s 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 2019-20 academic year, scholarships and grants paid for 25% of all college costs!2

While grants are generally awarded based on need, you can apply for scholarships yourself. 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 during your junior year of high school and apply every year of college—and graduate school. 

Not sure where to start? Register for Sallie Mae’s free Scholarship Search tool to get access to thousands of college scholarships or graduate school scholarships. Just fill out a profile based on your hobbies, interests, and field of study. Then you’ll get matched to scholarship opportunities that might be right for you. The more specific you can be in your profile, the more matches you’ll receive. You can even set up alerts, so you’ll be notified when new scholarships matching your profile become available. 

When it comes to paying for college and graduate school—always think, “free money first.”

 

Sallie Mae does not provide financial, tax, or legal advice and the information contained in this article does not constitute tax, legal, or financial advice. Sallie Mae does not make any claims, promises, or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys or other tax advisors regarding any financial strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Sallie Mae. Reproduction without explicit permission is prohibited.

1. Source: https://www.irs.gov/taxtopics/tc421 as of January 7, 2022

2. Source: How America Pays for College 2021