Wait, What? Scholarships Are Taxable?
By Matt Konrad
Up to date February 2024
Everybody is aware of what a scholarship is. It’s free, no-strings-attached cash to assist a pupil pay for his or her greater schooling.
Proper?
Normally. However not at all times.
In some instances, there are vital strings connected—together with a couple of conditions by which scholarship funds could also be handled as taxable earnings. Whereas it’s uncommon, it’s additionally vital for each college students and scholarship suppliers to know the way this could occur, and the way it may be averted.
A (Very) Temporary Historical past of The Tax Therapy of Scholarships
The tax standing of scholarships was first codified in 1954, and till 1980 it was exceedingly easy: for college kids pursuing a level, all scholarships, fellowships and grants had been tax-free, it doesn’t matter what the funding was used for.

The primary main change to this technique got here in 1980, when the Tax Therapy Extension Act was handed. This modification to the tax code specified that scholarships, grants or fellowships might be taxed in the event that they might be thought-about “charges for companies.” In IRS terms, meaning “[money] obtained as funds for educating, analysis, or different companies required as a situation for receiving the scholarship or fellowship grant.” Exceptions had been later added for educating and analysis assistantships and for sure federal pupil support applications, however this represented the primary time any earnings associated to scholarships was thought to be taxable.
The 1986 Tax Reform Act added considerably extra potential taxation to scholarship and grant funds. For the primary time, the brand new legislation specified that parts of scholarship support used for dwelling, journey or analysis bills could be handled as taxable earnings. Whereas later amendments eased a number of the tax burden (particularly for graduate pupil lecturers), this legislation stays on the books at this time—which means that stipends or money funds obtained for non-tuition bills will likely be thought-about taxable. (These funds ought to be accompanied by a 1099 tax type, making it simpler to incorporate them in your taxable earnings calculations.)

Lastly, present legislation additionally states that scholarships for non-degree-candidates are taxable. As skilled certifications and certificates applications change into extra fashionable—and even important, to industries like software program growth and engineering—these legal guidelines put increasingly more nontraditional college students liable to a heavy tax burden from scholarships.
The Hidden Value of Taxing Scholarships
As outlined by monetary support professional Mark Kantrowitz in this whitepaper for the National Scholarship Providers Association (NSPA), “There are a number of dangerous penalties of the federal government taxation of scholarships, grants and fellowships.The dangerous influence impacts the power of scholars to finish their schooling and graduate.Taxing monetary support prevents college students from making full use of their scholarships, fellowships and grants.Scholarships, fellowships and grants are the one type of generosity that’s taxed by the federal authorities.”
These penalties are most stark for the scholar: when extra of their scholarship funds go to taxes, they’ve much less obtainable to pay for his or her schooling. Making issues worse, most federal monetary support calculations are primarily based on the pre-tax worth of the scholarship, which means they danger a shortfall in support after they can least afford it.
There are additionally highly effective drawbacks for scholarship suppliers. As Kantrowitz says, “Non-public scholarship suppliers are reluctant to create new scholarship and fellowship applications and to broaden current applications as a result of taxation makes the applications much less efficient than different charitable functions.” As well as, whereas progressive scholarship funders could need to assist college students with the onerous prices of lease, board and transportation, the taxable nature of those funds blunts their influence.
The influence is very disproportionate on low-income college students. These from the underside earnings quartile spend, by far, the most important proportion of household earnings on greater schooling; virtually half of that cash is spent on the non-tuition prices for which scholarship awards are taxable. (Below present legislation, emergency monetary grants may be thought-about taxable earnings—and people grants are most important for low-income college students.)
These trying to save cash by attending two-year faculties are additionally more likely to be hit laborious. Based on The School Board, dwelling bills for college kids at group faculties could make up more than 70 percent of the cost to attend. Taxing scholarships which can be used for these bills provides an enormous burden to those that can least afford it, even when they’re attending college on a full-ride scholarship or in a tuition-free state.
Restoring Scholarships’ Tax-Free Standing
Whereas taxing scholarship funds could enhance authorities income within the brief time period, additionally it is short-sighted. As Kantrowitz explains, “Scholarships, grants and fellowships assist college students graduate from faculty. The federal authorities advantages financially from the elevated federal earnings tax income attributable to greater instructional attainment. So, it’s within the federal authorities’s greatest monetary curiosity to cease displacing scholarships, grants and fellowships by taxation.”
Scholarship America and analyst Mark Kantrowitz have made these 4 suggestions for doing so:
- Make clear that tax-free standing applies to college students pursuing a certificates, not only a diploma
- Make clear that tax-free standing applies to grants, scholarships, fellowships and tuition waivers, in addition to educating assistantships and analysis assistantships
- Substitute the definition of “certified tuition and associated bills” with a definition of “certified greater schooling bills,” outlined in relation to complete value of attendance
- Restrict tax-free standing to common college students enrolled at postsecondary establishments which can be eligible for Title IV federal pupil support
These 4 steps will be sure that new types of certification and new fashions of cost aren’t punished for being “nontraditional.” They will even guarantee certified scholarships can be found to pay for the complete value of schooling at eligible faculties and universities—and that can permit scholarships for use, tax-free, to pay for room and board, transportation to and from faculty, and disability- and different college-related bills.
As we work towards this purpose, it’s vital for all schooling stakeholders to make clear the present state of affairs, and to assist monetary support innovation and pupil assist.
This publish is predicated on analysis initially introduced on the Nationwide Scholarship Suppliers’ Affiliation Convention by Mark Kantrowitz of SavingForCollege.com and Despina Costopolous Emerson of Scholarship America. This publish was up to date Feb. 19, 2024 to mirror new statistics about dwelling bills.