Nothing signifies adulthood more than searching tax-related questions on the internet. And, if you’re asking Google if your college scholarship counts as taxable income, you’re definitely not alone. As it turns out, asking if scholarships are taxable is a common search on the internet. And for good reason, because the answer is “it depends.”
Let’s break down if the financial aid you receive will increase your taxable income:
Are scholarships taxable?
The IRS explains that all or part of a scholarship or grant can qualify as tax-free, meaning you don‘t have to pay taxes on it. But (there’s an exception!) part of your scholarship or grant money may be considered taxable income if you are not working toward a degree or not pursuing your education at an accredited institution.
So when isn’t a scholarship taxable? A scholarship isn’t taxable if your school maintains a regular faculty, curriculum, and enrolled student body. You can check to see if your school is an eligible institution here.
Here’s where it gets sticky: You must use your scholarship or grant funds on tuition and fees, textbooks and supplies, and/or other materials or equipment required for your coursework. If you meet these requirements, your scholarship or grant will likely be tax-free.
But if you have money left over after paying for these qualified education expenses, you may need to report that remaining amount as part of your gross taxable income. Any scholarship money you spent on room and board, food, or other living expenses may be taxable, too, because they aren’t considered qualified expenses.
Stipends aren’t the same as scholarships (and they’re taxable!)
Some students may receive something called a stipend while in school. A stipend is usually, at least in part, compensation for a service you provide (or will provide in the future). For example, ROTC students often get stipends while in school because of their military obligation during or after graduation.
If you receive a stipend while working toward a degree, this might feel the same as a scholarship. After all, it’s money you can use to put toward your education expenses that you don’t have to pay back. But because a portion of your stipend is designated as payment for a service, that’s considered taxable income and should be reported in the year you receive it.
Still unsure? The IRS has a handy Interactive Tax Assistant quiz that can help you determine if the scholarship, fellowship, or grant is taxable. Check out this tool, and/or consult a professional tax advisor.
Other forms of financial aid: Are student loans taxable?
Even if you have scholarships, it might not be enough to cover the full cost of your education. In this case, you may take out student loans to pay the rest of your college bill — and you may be wondering if loans are taxable, too.
Because you need to repay loans, you don’t keep the money and, therefore, the money doesn’t count as taxable income. Neither federal nor private loans count as taxable income if you repay them in full.
However, this could change if you qualify for student loan forgiveness through a repayment plan. You may have a certain amount of your student loan balance forgiven, but that balance is subject to ordinary income tax rates in the year of forgiveness.
That’s not necessarily a bad thing and doesn’t mean you shouldn’t seek student loan forgiveness if you qualify — but be aware of the tax implications so you can plan ahead and prepare for that tax bill in the future. These guidelines can help get you started, but you should always consult a tax professional to help you sort out your specific situation and tax eligibility.