Back To School: Making Sense Of Scholarships, Grants & Fellowships
We all know that college is expensive. The College Board reports that, for the current school year, a “moderate” college budget for an in-state public college averaged $22,261 and the same at a private college averaged $43,289.
Those dollars include not only the cost of college tuition but also room and board and related expenses. Paying for all of that can be tricky. Parents and students rely on a number of options to pay the bills, including loans and savings plans. There are also a number of scholarships, fellowships and grants available for qualified students. Scholarships are generally funds paid to or for the benefit of a student at an undergraduate or graduate school who is studying for a degree; fellowships are funds paid for the benefit of a student who is studying or pursuing research; and grants are most commonly awarded to eligible students by government entities on a financial or other needs basis and are not expected to be repaid.
Scholarships, fellowships and grants feel like “free money” and, as such, the assumption tends to be that the money is likewise federal income tax free. But that’s not always true. Whether scholarships and fellowships are federal income tax free will depend on a number of factors including what the funds can be used for and whether or not you’re pursuing a degree. Federal and state educational grants are treated like scholarships for tax purposes.
Here’s the easy rule: a scholarship, fellowship or grant is tax free only if you are pursuing a degree at an eligible educational institution and you use the scholarship or fellowship to pay qualified education expenses. If you are not pursuing a degree, the full amount is subject to tax.
Qualified expenses include tuition and fees as well as course-related expenses such as fees, books, supplies, and equipment that are required by the institution. Qualified education expenses do not include room and board, travel, research, clerical help, or equipment and other expenses that are not required for enrollment in or attendance at the institution. Any amounts received as a scholarship or fellowship used to pay these costs are considered taxable and must be included in gross income.
It does not matter what your special skill might be to earn your scholarship. Whether you’re champion of the chess club, the smartest girl in school or the most accurate passer on the football team, you will be treated the same. An athletic scholarship is treated the same as an academic scholarship for tax purposes.
If you win a scholarship in a contest – a new prize trend these days – the scholarship is fully taxable unless you’re otherwise excepted.
If you have to work for the scholarship or fellowship, money received in exchange for past, present, or future teaching, research, or other services is generally taxable. Exceptions apply if you receive funds under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Additionally, payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free.
If your scholarship is federal income tax free – and it’s the only income you receive for the year – you don’t have to file a federal income tax return at all. However, any taxable portion of your scholarship or fellowship on your tax return should be reported on your federal income tax return even if you don’t owe any tax. Keep in mind that schools are not required to issue a form W-2 or 1099 to you for most scholarships, fellowships and grants unless you perform services, so keep good records on your end. And remember: no double dipping. You can’t exclude fellowships and scholarships from income and then deduct them as educational expenses.
Statistically, most scholarships, fellowships and grants are actually earmarked for tuition and fees which works out well for tax reasons but leaves students scrambling to pay expenses associated with room and board. As a result, dorm rooms often have a look that screams “I’m a poor student” (at least mine did).
