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Are Scholarships Tax Deductible?

4 min read

Last Updated: February 26, 2025

Table of contents

Key Takeaways

Money from a scholarship fund isn’t taxable when used for qualified expenses.
Leftover money from your scholarship that exceeds the cost of qualified expenses may be counted part of your taxable gross income.
You should consult a professional tax advisor for more information on your scholarship tax liability.

If you’re a scholarship recipient, you may wonder about tax implications. Are your scholarship funds taxable? Are your scholarship funds tax deductible?

To gain a better understanding of how to handle your scholarship on your taxes, it’s important to consider some definitions and applicable tax laws. This article is a great starting point to understanding scholarships and taxes, but doesn’t replace the advice of a licensed Certified Public Accountant (CPA) or Enrolled Agent, who can represent you should you ever be audited by the IRS.

What is a scholarship?

According to the Internal Revenue Service (IRS), “A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study,” and they differ from fellowships and grants. Scholarships can help make the cost of education a little less burdensome for students and families. And unlike a student loan, it’s uncommon to have to pay back scholarship funds.

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Scholarships can help you cover the cost of tuition and other school fees. You might use all of your scholarship on your tuition, but if you have money left over you might also buy textbooks, cover room and board, or purchase a school meal plan. How you spend your scholarship money may mean all or part of your scholarship is taxable income.

What’s the difference between a tax deduction and taxable income?

What is taxable income? According to the IRS, “Most income is taxable unless it’s specifically exempted by law. Income can be money, property, goods or services. Even if you don’t receive a form reporting income, you should report it on your tax return.” They go on to say that some scholarships are taxable.

What is a tax deduction? A tax deduction, on the other hand, is explained by the IRS as “an amount you subtract from your income when you file so you don’t pay tax on it. By lowering your income, deductions lower your tax.” Because a scholarship is neither an expense nor loss, it doesn’t fall into the category of a tax deduction.

Are scholarships tax deductible?

The United States has some tax rules that you should be aware of when you’re a scholarship student. Your best source of tax law and rules is the IRS. Their website is IRS.gov. Your next best resource is a Certified Public Accountant (CPA) or Enrolled Agent, who can represent you should you ever be audited by the IRS.

The good news is that typically the IRS does not see scholarships as income (which means it's not taxable). So, in some cases, you may not have to worry about paying taxes on the award.

The IRS states in Topic no. 421 that scholarships, fellowship grants, and other grants are tax-free if:

“You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.”

Scholarship money can sometimes count as taxable income

There are exceptions where you’ll need to include a scholarship in your gross income. The IRS states in Topic no. 421 that these exceptions include:

“Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant.
However, you don't need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.”

In these cases, the IRS may consider that amount taxable income and you should declare it when you fill out your tax return.

Scholarship income isn’t taxable if used on qualified education expenses

The key to having a tax-free scholarship is that the expenses the scholarship covers must be a requirement for all students in your program. They can't be things that go beyond what you need to satisfy your program requirements. You can review what counts as a qualified education expense on the Internal Revenue Service’s website.

It’s important to note that even if the scholarship covers costs such as accommodation or food (expenses that are not directly related to tuition but are still essential for a student), there may be tax implications. It’s important to consult a tax professional before filing your taxes.

If you spend your scholarship money on these expenses it could make your funds taxable income

If you have scholarship money left over after covering qualified educational expenses, you may need to include the remainder as part of your gross taxable income. According to the IRS, scholarship money may add to your tax liability when used to pay for:

Room and board
Travel
Research
Other non-qualified expenses

It's important to keep all receipts and documents related to your education expenses. They may come in handy in the future, especially if you ever get audited.

The best way forward is always to educate yourself. You should consult a tax expert or an accountant who is familiar with tax laws relating to grant and scholarship funds.

Other financial aid information you need to know

In addition to scholarships, you may receive other types of financial aid. For example:

Student loans: This is money that you must pay back in the future. According to the Federal Student Aid website, “You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.”
Grants: Unlike scholarships, grants might link to specific projects or research. Be aware that they may have different tax rules.

Practical advice on scholarships and taxes

If you are in doubt about how to manage your scholarship from a tax perspective, here are some tips:

Get help: Talk to an accountant or tax advisor.
Use online resources: There are many places where you can get tips and advice, including the Internal Revenue Service’s own website. This can be a good starting point.
University help centers: Some universities may offer free or low-cost tax advice services for students.

The bottom line

Scholarships can be a big help for students. It’s important to prepare yourself with the facts of your scholarship requirements and the applicable tax law. Remember, if you have questions or uncertainties, always ask a tax expert for advice.

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