Students and Scholarships

As the cost of education continues to rise, parents and students look for ways to decrease the financial burden placed on them today. One way to offset these costs is to find and apply for scholarships.  This type of financial aid is awarded to students to further their education and does not have to be paid back. But…are there tax implications?

Scholarships are considered tax-free as long as they meet certain criteria. The recipient must be a degree seeking candidate at an accredited educational institution and must be enrolled at least part-time. The award has to be used for “qualified educational expenses”. These include tuition and fees, books, supplies, student activity fees, and equipment necessary to complete the classes you are enrolled in.

There are, however, situations when scholarships can be taxable. Awards used for expenses, other than the ones mentioned above, would need to be included in gross income. Amounts paid for room and board, travel to and from campus (though travel required as part of a class would be a qualified educational expense), incidental expenses, optional supplies, transportation, insurance, and medical expenses, are examples of these. Additionally, any scholarship award received as payment for teaching or research also needs to be included in gross income as it is considered an exchange for services. Should you receive a scholarship amount valued over your total qualified educational expenses for a given year, that difference to, would be included in income.

There are, however, a few exceptions. Payments made through the GI Bill, students participating in the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program, or a comprehensive student-work-learning-service program operated by a work college are not included as income.

A scholarship can also affect possible tax credits available to you. The American Opportunity Tax Credit and Lifetime Learning Credit are valuable education credits available to offset the high cost of education. To determine if you still qualify for one of these credits after receiving a scholarship, subtract the award from the total qualified educational expenses you have for the year. If there are still qualified expenses remaining, you can use this amount to calculate the education credit available to you. If not, no credit can be taken.