Know When Scholarships are Taxable So You Can Plan Accordingly
Scholarships can be an excellent resource for covering college costs. But sometimes, that gift aid is not so free and clear. Scholarship money can be taxable to students depending on how it’s used.
The short version is that scholarship funds are non-taxable when used for expenses that are required for enrollment or attendance – including tuition, fees, books, and supplies.
Thereafter, any scholarship amounts not related to the required costs and fees are subject to income tax, such as room and board, travel, optional fees, and optional supplies.
While students with taxable income below the current allowable standard deduction of $13,850 (2025) will not end up paying taxes, tracking scholarship types and amounts and student income becomes a critical task and adds a little more complexity to your college journey.
When Are College Scholarships Not Taxable?
The IRS generally considers a scholarship as tax-free based on the following criteria:
- Student attends an eligible educational institution. The school must be accredited to provide higher education and participate in federal student aid programs:
- Colleges and Universities – offer degree programs, such as bachelor’s, master’s, or doctoral degrees
- Vocational Schools: offer programs leading to a certificate, diploma, or other credential like technical, trade, or skill-based training
- Community Colleges – are two-year schools offering associate degrees, certificates, and other workforce training programs.
- Funds are used for Qualified Educational Expenses:
- Tuition and fees required for enrollment
- Required textbooks, supplies, and equipment for courses
- Course-related fees, such as lab fees
When Are College Scholarships Taxable?
- Funds used for Non-Qualified Expenses:
- Room & Board
- Travel
- Personal expenses (e.g., clothing or a new laptop)
- Service-Based Scholarships:
- If a student is required to perform services (like working as a teaching or research assistant or being an athlete on a scholarship), the portion of the scholarship used for this service (often considered a stipend or wages) is taxable income.
- Scholarships or Fellowships That Are Not Used for Degree Programs
- The Scholarship Covers a Non-Qualified Educational Institution:
- If you receive a scholarship to attend an institution that is not accredited or recognized by the IRS as an eligible educational institution
- Excess Scholarship Funds:
- The excess amount is taxable if the scholarship exceeds your qualified educational expenses (e.g., your total tuition, books, and required fees.)
Example Scenarios
Here are a few examples to clarify when a scholarship would or wouldn’t be taxable income:
Scenario 1: Scholarship Used for Tuition and Required Supplies
You receive a $10,000 scholarship, and you use it to pay for $9,000 in tuition and $1,000 for required textbooks and course supplies. This scholarship is not taxable because the funds were used for qualified educational expenses.
Scenario 2: Scholarship Used for Room and Board
You receive a $10,000 scholarship, and you use $7,000 for tuition and $3,000 for room and board. The $7,000 for tuition is not taxable, but the $3,000 for room and board is taxable income because it’s considered a personal living expense.
Scenario 3: Scholarship for Service – Research Assistant
You receive a $12,000 scholarship to cover tuition and an additional $5,000 stipend for working as a research assistant. The $12,000 for tuition is not taxable, but the $5,000 stipend is taxable income because it’s payment for services rendered.
Scenario 4: Scholarship for Non-Degree Program
You receive a $15,000 scholarship for a non-degree program or certification. This scholarship is taxable because it is not for a degree program at an accredited educational institution.
More detailed information on scholarship taxability can be found on the IRS website.
How to Report Taxable Scholarships
If a student receives a taxable scholarship, the income must be reported on the tax return. Here’s how to handle it:
Form 1098-T: Colleges typically provide a Form 1098-T to students, which reports the total tuition and related expenses. This form is helpful for claiming education tax credits, but it may also help in determining how much scholarship money is received and whether any of it is taxable.
IRS Form 1040 Schedule 1: This form is used to report employment income, wages, and additional income sources.
What Are Student Tax Rates?
When scholarship money is taxable, those funds are considered part of the student’s gross income. Students are subject to standard tax rates based on their filing status and income level:
- Standard Income Tax Rates: For 2025, the income tax rates for individuals range from 10% to 37%. For most students, the taxable portion of their scholarship will likely fall into the lower tax brackets, but this can vary depending on the amount of scholarships and other income.
- Tax Filing Requirements for Students: If a student’s total taxable income (including taxable scholarships) exceeds the standard deduction for their filing status, they will need to file a tax return. The standard deduction for a single filer in 2025 is $13,850, meaning an unmarried student earning less than that amount, including taxable scholarship income, wouldn’t necessarily need to file.
How Do Taxable Scholarships Impact Paying for College?
Students with taxable scholarship income may face more complexity in managing their college finances, including:
Tax Bills
With all the effort and time that goes into winning scholarships, throwing potential taxes into the mix adds another layer of work. Wading through tax-related paperwork and/or consulting with a tax professional requires time and money.
If a student already works part-time or has other sources of income, taxable scholarship income could push them into a higher tax bracket and then into facing more taxes.
Financial Aid Calculation
Taxable scholarship income could reduce eligibility for other forms of need-based aid, such as grants or work-study.
Because scholarships are considered part of a student’s financial resources, a taxable scholarship counts as income in the financial aid formula.
Displacement of Aid: If a student’s scholarship is large enough to reduce their financial need because the scholarship is counted as income, a school may reduce other forms of need-based aid to account for this “extra” income. Essentially, the taxable scholarship “displaces” the need for the aid that would have otherwise been awarded.
Example: If a student qualifies for $10,000 in need-based grants and receives a taxable scholarship of $5,000 for room and board, the school might reduce the grant by $5,000, effectively leaving them with $5,000 in need-based grants instead.
This scenario is now a double whammy for the student, receiving less financial aid to pay for college and potentially paying taxes on the scholarship income.
Maximize the Value of Scholarships and Avoid Debt
Scholarships are an essential component in college funding, whether from schools directly or outside sources and are an excellent way to avoid too much college debt. However, the taxability of scholarships may complicate your planning.
Maximizing the full benefit of scholarships and covering more of your college costs while not losing ground to taxes requires a strategic approach.
Given that everyone’s situation may differ, evaluating scholarships in terms of your financial situation is essential.
The first step is to figure out if awarded scholarships have a taxable impact. If the answer is ‘yes,’ you may need to consider different options, like doing a jigsaw puzzle, to make the situation work to your best financial advantage.
Here are a few tips:
*Know the estimated Cost of Attendance for each school on your list
Identify the costs that are required for attendance, and then separately note the other expected costs. You will need this information to understand which costs any awarded scholarships will cover.
*Identify scholarship terms
How are the scholarships designated? Do they specify how the funds are to be used – just for the required costs or is the aid available to cover any cost?
- If scholarships are designated only for mandatory costs, such as tuition and fees, then you don’t have to consider any taxable income impact;
- If scholarships can be used for any cost, then continue determining how best to utilize them.
*Calculate student income for the calendar year
If student income for the year, including taxable scholarship amounts, falls below the standard deduction, then the student will not have to pay taxes. The standard deduction for 2025 is $13,850.
Example: Let’s say a student receives a $20,000 scholarship that covers tuition plus room and board.
Tuition $10,000 + Room & Board $10,000. If the student has no other income for the year, then the portion of the scholarship that covers room and board (a non-qualified expense for scholarships, considered taxable income) will not cause the student to have income that exceeds the standard deduction for the year, and therefore the student will not owe taxes because of the scholarship.
*Use scholarships in tandem with 529 plan funds or other personal savings.
Strive for as much scholarship money as possible to pay for required expenses, such as tuition, as those scholarship funds will not be taxable.
And still, seek out scholarships that may cover taxable expenses like room and board. One option is to consider only accepting the portion of those funds that keep the student’s taxable income below their annual standard deduction. Use your 529 plan savings or other personal savings to cover remaining expenses afterward.
Importantly, room and board can be a significant component of your college costs, equaling upwards of 50% or more. The average for one year is $12,302 for public, 4-year institutions and $13,842 for private schools.
As well, some schools have lowered their tuition costs while simultaneously raising their room and board costs. So, seeking scholarships that can help reduce room and board costs can be impactful in lowering your out-of-pocket costs.
Worth noting: “qualified educational expenses” has different meanings for scholarships than for 529 College Savings Plans.
Qualified educational expenses for scholarships relate more to identifying the direct cost of college in the financial aid calculation and determining potential scholarship taxable income.
Qualified educational expenses for 529 College Savings Plans include a broader list of expenses, such as tuition, fees, books, room and board, and student loan repayments. 529 plans can be a tax-efficient way to personally save money to cover future college costs.
*Accept the scholarship and pay the taxes
While no one enjoys paying taxes, the opportunity of having scholarship money that significantly reduces your out-of-pocket college cost and helps you avoid expensive college-related debt may outweigh the current tax impact. Consult with a tax professional to better understand any tax impacts on your financial situation and for guidance in avoiding costly mistakes.
Summary
Navigating college funding is challenging, and scholarships can add some complications to the process.
Reduce the potential confusion and stress about the tax impact of any scholarships by making a plan for when and how best to use this student aid.
Work with scholarship providers, school admissions, and financial aid offices to help create the best solutions for reducing your college costs and helping you avoid college debt.
Keep detailed records, including copies of tax-related documents. Track scholarship information, including how scholarship funds are used (tuition, textbooks, living expenses, etc.) and to ensure compliance with IRS rules.
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