Interview with Amanda Moon, International Scholarship & Tuition Services, Inc.

Most students in the United States can determine whether or not their scholarship is eligible for a tax penalty simply by answering the following two questions:

  1.  What type of student are you?
    Students fall into two categories: degree seeking and non-degree seeking. Your category is determined by whether you are attending school for just a few classes or if you are pursuing a degree (such as Associate, Bachelor or Masters).  You are not required to have declared a major or attend school full-time to be considered degree seeking, but you must plan to graduate. You were asked to declare your intention when you registered with your school, so you can check with your school’s Registrar’s Office if you’re not sure of your category.
  2. How will you use the scholarship money?
    College costs fall into two categories when it comes to scholarships – qualified and non-qualified. Tuition is considered a “qualified expense” by the Internal Revenue Service (IRS). Other “qualified expenses” include fees, books and supplies as long as they are “required of all students in your course of instruction” (like that technology fee your school might have made you pay!) Items like laptops and printers are not qualified unless they are specifically noted as required in course documentation, like a catalog or syllabus.

    Other expenses – such as room, board and incidentals – are never considered qualified. Scholarship funds are taxable if used for these types of expenses, so many scholarship programs prohibit schools from releasing funds for these purposes.

The Bottom Line: A scholarship is not taxable when the student is seeking a degree and uses his or her scholarship funds for a qualified expense. Scholarships given to students who are non-degree seeking or used for non-qualified expenses are always taxable and must be reported to the IRS. Consult a tax professional or review this document for more information on scholarships and taxes.