Attending college is part of the American dream, and more than one in four U.S citizens has a college degree. But four years (or more) of college costs a great deal of money, and many students rely on financial aid like college scholarships to get them through.
There are many forms of financial aid including loans, grants, and scholarships. While there are several federal student loan programs available (including Stafford loans, Perkins loans and PLUS loans), many students manage to earn college scholarships to pay for their higher education expenses by dint of good grades or exceptional extracurricular activities or plain old fashioned connections. And not surprisingly given the multitude of scholarships awarded every year, the question of whether these scholarships are taxable or not comes up frequently.
College Scholarship Money and Taxable Income
The basic rule about college scholarship money and taxes is that any funds from a college scholarship that are used to pay for qualified education expenses of a candidate for a degree at an academic institution are not taxable. Any funds received greater than a student's qualified education expenses are taxable income, and must be reported to the IRS (using Form 1098-T) like any other ordinary income.
Qualified Education Expenses
The crux of the matter is the definition of qualified education expenses. The IRS has a relatively strict interpretation of qualified education expenses. According to the IRS, qualified education expenses include all tuition and class-related fees, books, and/or any other equipment and supplies necessary for your classes. Generally only fees that are paid by all students are considered qualified education expenses, so lab fees are considered a qualified education expense, but optional athletics fees for access to student tickets for sporting events are not.
Expenses That Do Not Qualify
Any expenses relating to room and board, travel, research, or clerical help are expressly mentioned by the IRS as not qualifying as education expenses, so therefore any money received from college scholarships and used for these expenses is ordinary taxable income. Parking fees and fees for most extra-curricular activities are also not considered qualified education expenses.
IRS Form 1098T
Although they are not required to do so by the IRS, many financial aid departments send Form 1098T to students receiving scholarships by Jan. 31 every year as a courtesy to inform students that the IRS has been notified of the amount of scholarship funds received above qualified education expenses for the tax year.
For more on financial aid, taxes, loans, and student life see:
Student Loans and Financial Aid – Title IV Educational Loans
Top Ten Best College Towns - Top Education and Quality of Life
The Tax Benefits of Having Children–Families & the U.S. Tax Code
Clayton Browne - Clayton Browne has a BA and an MS in Anthropology, and has been writing professionally since 1994. He worked for many years in both ...
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