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Home » Student Life » Scholarship » Taxable Scholarships: Is That Money Really Free?

Taxable Scholarships: Is That Money Really Free?

Updated: November 18, 2022 By Mark Kantrowitz

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taxable scholarships

All or part of your scholarship to pay for college may be taxable. Shocking, isn’t it?

Scholarships are the only form of generosity that can be taxable to the recipient. If a donor contributes money to a homeless shelter or soup kitchen, the services are tax-free to the beneficiary.

But if the donor awards a grant or scholarship that covers a student’s housing and meal plan expenses, the scholarship is considered taxable income to the recipient. That’s even though more than half of college students experience food or housing insecurity according to a national survey in 2019, before the pandemic. 

The tax on scholarships prevents students from making full use of their scholarships. Learn the rules concerning tax-free and taxable scholarships.

Table of Contents
Growth In Taxable Scholarships
Which Scholarships Are Tax-Free?
How To Report A Taxable Scholarship
Workarounds For The Tax Treatment of Scholarships

Growth In Taxable Scholarships

The number and amount of taxable scholarships reported on federal income tax returns has grown significantly in recent years. This table is based on estimates reported in the IRS Statistics of Income as well as data received from the IRS through a FOIA request.

Tax Year

Number of Returns
Reporting Taxable Scholarships

Amount of
Taxable Scholarships

2020

857,783

$4.11 billion

2019

832,107

$3.91 billion

2018

806,016

$3.41 billion

2017

703,682

$2.86 billion

2016

188,215

$886.6 million

2015

44,016

$325.1 million

Which Scholarships Are Tax-Free?

The Internal Revenue Code of 1986, at 26 USC 117, sets several requirements for the tax treatment of scholarships. Below we break down these rules to show the differences between tax-free and taxable scholarships.

Tuition, Fees, Books, And Supplies

Generally, for a scholarship to be tax-fee, it must be used to pay for tuition and required fees, books, supplies or equipment. Only the portion of the scholarship that is used to pay for these qualified tuition and related expenses is tax-free.

If an educational institution provides a tuition waiver or tuition reduction to its faculty and staff, it is tax-free if this benefit is provided on substantially the same basis to all members of a group of employees. The group of employees must not discriminate in favor of officers, owners and highly-compensated employees.

The student must be pursuing a degree or certificate at an accredited educational institution. Otherwise, the entire amount of the scholarship is taxable.

Living Expenses

The portion of a scholarship that is used to pay for room and board, transportation, disability-related expenses, dependent-care costs and other living expenses is taxable. This includes amounts that are earmarked for living expenses, such as a living stipend, even if the recipient uses the scholarship to pay for qualified tuition and related expenses.

Fee For Services

If a scholarship is considered a fee for services, such as an employee benefit, the entire amount of the scholarship is taxable. A scholarship is considered fee for services if the services are required as a condition of receiving the scholarship. There are, however, exceptions for graduate teaching and research assistantships and certain federal health professions scholarships.

The rules above apply to all types of scholarships and grants, including private scholarships, athletic scholarships, Pell Grants and Fulbright Grants. Veterans education benefits, however, are tax-free.

Emergency Relief

Emergency financial aid grants made under the CARES Act in connection with the COVID-19 pandemic are tax-free, even if used to pay for living expenses. This provision is limited to qualified disaster relief payments for the duration of the pandemic (26 USC 139). It does not apply to other taxable scholarships.

How To Report A Taxable Scholarship

Recipients of taxable scholarships, grants, fellowships and tuition waivers during the tax year are required to report the taxable portion on their federal income tax returns. 

The taxable amount of the scholarship should be reported on line 1 of IRS Form 1040. If the taxable amount of the scholarship was not reported on IRS Form W-2, write “SCH” and the taxable amount on the dotted line next to line 1.

Related: Best Free Tax Software for 2023

Workarounds For The Tax Treatment Of Scholarships

Scholarship providers have started exploring ways to award scholarships that reduce the tax impact. These include awarding the scholarship as a contribution to the student’s 529 college savings plan or through student loan forgiveness. 

An added benefit is these alternatives can eliminate or reduce scholarship displacement. Scholarship displacement occurs when a college reduces the amount of its own grants after the student receives a need-based scholarship. If a scholarship is used in the calculation of the Expected Family Contribution (EFC), scholarship displacement cannot occur. 

Normally, the taxable portion of a scholarship is subtracted from total income on the Free Application for Federal Student Aid (FAFSA). So the receipt of a scholarship does not affect the EFC. However, if a scholarship is awarded as a contribution to the student’s 529 college savings plan, which is reported as an asset on the FAFSA, it has a small impact on the EFC (increasing it by up to 5.64% of the amount of the scholarship).

Similarly, if a scholarship is awarded through student loan forgiveness after the student graduates, it does not affect the student’s eligibility for need-based financial aid.

Mark Kantrowitz
Mark Kantrowitz

Mark Kantrowitz is an expert on student financial aid, scholarships, 529 plans, and student loans. He has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, U.S. News & World Report, MarketWatch, Money Magazine, Forbes, Newsweek, and Time. You can find his work on Student Aid Policy here.

Mark is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. He previously served as a member of the board of directors of the National Scholarship Providers Association. Mark has two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU).

Editor: Robert Farrington

Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
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