Are Scholarships Taxable: What the IRS Says About Grant and Scholarship Money

The basic IRS rule

Under IRS Publication 970 , for 2025 tax returns filed in 2026, a scholarship or fellowship grant is tax free only if you are a candidate for a degree at an eligible educational institution, and only up to the amount you spend on qualified education expenses. Qualified expenses mean tuition, required fees, and required course-related costs such as books, supplies, and equipment your school specifies.

What stays tax free

• Tuition and mandatory fees charged by the school

• Books, supplies, and equipment required for your courses

• Amounts that do not exceed your total qualified expenses for the year

What becomes taxable

Scholarship or grant money that pays for room, board, travel, research, clerical help, or optional equipment counts as taxable income, even for a full-time degree student. This applies whether the school pays it directly to you or applies it to your account.

Example: how the math works

Say your college awards a $30,000 scholarship for the year. Tuition and required fees total $22,000, and required books and supplies cost $1,500.

That leaves $23,500 in tax-free scholarship money. The remaining $6,500 pays for your dorm room and meal plan, so you report it as taxable income.

You must be a degree candidate

Tax-free treatment only applies if you pursue a degree at a college, university, or vocational school with a regular faculty, curriculum, and enrolled student body. Grants and scholarships paid to non-degree students, or amounts tied to a work requirement such as teaching or research duties, generally count as taxable wages instead.

Scholarships tied to work

Some fellowships and assistantships require you to teach, research, or perform other services in exchange for payment. The IRS treats that portion as wages, not a scholarship, regardless of whether you use it for tuition. Your school reports these amounts on a W-2, and you pay tax on them the same as any job.

Where your 1098-T fits in

Your school sends a Form 1098-T each January showing scholarships, grants, and payments received for the year. This form helps you figure out qualified expenses and taxable scholarship amounts, but the school does not calculate the taxable portion for you. Compare the 1098-T against your billing statement to see how much of your scholarship covered tuition versus room, board, or other costs.

How to report taxable scholarship income

If part of your scholarship is taxable and you did not receive a W-2 for it, report the taxable amount on Schedule 1 (Form 1040), line 8r, which then carries over to your Form 1040. You do not need a separate schedule for this unless you also have self-employment or other income to report. Keep your school's billing statement, since it documents which part of your scholarship covered tuition versus room and board.

Scholarships and 529 plan withdrawals

If your family also has a 529 college savings plan, you can withdraw an amount up to your tax-free scholarship without paying the usual 10 percent penalty on non-qualified withdrawals, though the earnings portion still counts as taxable income. This lets a family recover 529 funds set aside for tuition that a scholarship ended up covering instead, without the penalty that normally applies to non-education withdrawals.

Withholding and estimated taxes

Schools do not withhold income tax from scholarship money the way employers withhold from a paycheck. If your taxable scholarship amount is large enough to trigger a tax bill, make estimated quarterly payments to the IRS, or ask your parents to adjust their own withholding if they claim you as a dependent. Taxable scholarship income above certain amounts also triggers the kiddie tax rules for dependent students, which taxes some unearned income at a parent's rate.

Why some families report scholarship income on purpose

The American Opportunity Tax Credit and Lifetime Learning Credit apply to tuition and fees you pay out of pocket, not amounts covered by tax-free scholarships. Some families choose to include a portion of the scholarship in taxable income so more tuition counts as out-of-pocket, which increases the credit they claim in specific cases. Check the IRS qualified education expense rules or work with a tax preparer before choosing this approach.

Does taxable scholarship money affect financial aid?

Scholarship income you report on your tax return shows up on the following year's FAFSA as income, which can lower your eligibility for need-based aid. Talk to your school's financial aid office before you accept an award structured mostly around room and board, since the tax bill and the aid effect both land in the following cycle.

Scholarships that require you to report each year

Colleges frequently package multi-year scholarships that specify separate amounts for tuition and for room and board. Ask your financial aid office for a written breakdown each fall, since the taxable share can change from year to year as your tuition, fees, and housing costs change or as you add other scholarships and grants.