Do you pay taxes on scholarship money?
Scholarship money spent on tuition, required fees, books and required supplies is generally tax-free for degree candidates. Money spent on room, board, travel or optional equipment is generally taxable income to the student, as is any amount paid for services such as teaching or research. Keep records showing how each dollar was spent.
The dividing line is what the money buys
For a degree candidate at an eligible institution, the tax treatment of a scholarship or grant depends on how the money is spent, not on who gave it.
- Generally tax-free — qualified education expenses: tuition, fees required for enrollment, and books, supplies and equipment required of all students in the course.
- Generally taxable: room and board, travel, optional equipment, and any other living costs — even when the scholarship was designed to cover them.
A full-ride covering housing is not entirely tax-free. The housing portion is generally taxable income to the student, which catches families by surprise in the first spring after enrollment.
Money paid for work is different
Amounts that represent payment for teaching, research or other services required as a condition of receiving the award are generally taxable, even if the money is spent on tuition. This most often affects graduate assistantships rather than undergraduate scholarships.
What to keep
The burden of showing how the money was spent sits with the taxpayer, so keep:
- The award letter stating the amount and any restrictions on its use
- Form 1098-T from the institution
- Billing statements showing tuition and required fees
- Receipts for required books and supplies
Where an award is unrestricted, applying it to tuition and required fees first — and covering housing from other sources — generally produces a better tax outcome than the reverse.
This article is for informational purposes and does not constitute tax, financial or legal advice. Rules change and individual situations vary. Consult IRS guidance or a qualified tax professional for your family's circumstances.
How Solyo helps
Solyo's scholarship directory records what each award is restricted to — several state programmes explicitly limit funds to tuition, mandatory fees, books and supplies — which is exactly the information that determines tax treatment later.
Free tools mentioned in this article
No account required. Use these tools to take the next step.