There’s nothing like your first-ever paycheck to teach you about the reality of taxes. And as we get older, the many ways our money goes to the government become even more apparent.
To find out if this could happen to you, check out the information below and see which rules apply to your college awards and whether your scholarships are taxable income.
Are scholarships taxable? It depends
So, are scholarships taxable income? The answer lies in what type of scholarship you have. Below are the tax implications for college scholarships, as explained by the IRS.
Scholarships covering tuition at an eligible educational institution: not taxable
According to the IRS, an “eligible educational institution” is defined as follows:
- The main purpose is formal instruction.
- It regularly maintains a faculty and curriculum.
- It normally has an enrolled student base where it performs instruction.
Additionally, you must be a candidate for a degree at such an institution. That means your school has to offer the credits necessary to get that degree. That said, schools offering a training program for a “recognized occupation” can also qualify for tax-free scholarships, so it’s best to check with the school in question if you think you fall into this category.
If you use your scholarship for expenses other than tuition, such as room and board, it might be taxable. Likewise for payment for services you agree to do for the scholarship, such as teaching or conducting research.
Scholarships covering non-eligible educational institutions: taxable
According to the IRS, “a scholarship or fellowship grant is tax-free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.”
If not, you’ll have to include your scholarship money on your taxes as income.
Scholarship funds that exceed qualified education expenses: taxable
Room and board can be a pricey part of the college experience, so it might come as a surprise that scholarship or grant funds used for that purpose could be taxable. The same goes for any funds that exceed the cost of your tuition.
Scholarships and grants can have parts that aren’t taxable and parts that are. That’s why you need to know about “qualified education expenses.”
Qualified education expenses include the following:
- Course-related required expenses, such as books and supplies
Expenses that aren’t qualified seem to be whatever happens outside the classroom, including room and board and travel. Scholarship funds used for those expenses would be taxable.
Scholarships covering payment for your services: taxable
There are times when a scholarship or grant comes with a stipulation requiring you to work for it — by teaching or conducting research, for example.
In those cases, you’ll most likely have to treat payment for those services as taxable income.
But there are exceptions to this rule.
If your services are being paid for by the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, then you’re not required to treat that payment as taxable income. The same goes for services paid for in work-learning-service programs, as defined in Section 448(e) of the Higher Education Act of 1965.
Veterans benefits: not taxable
If you’re a veteran, the IRS doesn’t consider funds you get for education or training to be taxable income. That said, the IRS does caution you to be aware of the tax implications of any other grants or scholarships you receive.
Other scholarships and grants: it depends
What about the other ways you might receive funds for your education? Consider the following:
- Athletic scholarships
- Fulbright scholarships
- Need-based education grants
According to the IRS, all of the above “are tax-free to the extent used for qualified education expenses during the period for which a grant is awarded.”
Are your college scholarships taxable? Here’s what to do
If any or all of your scholarships are taxable, the first thing to do is find out how much of the amount is taxable. You can do so with the help of this worksheet from the IRS.
You can find instructions on how to report the taxable amount on your taxes here. The process differs depending on which tax form you use.
Even if your college scholarships are taxable, avoiding debt is key
If you just found out that your college scholarship could be taxable, you might be feeling a bit frustrated right now. After all, that money is supposed to help you with school, not cost you more money.
There’s good news, however. If you do your taxes properly, it might not cost you much. Here’s an example scenario:
- You find out that $15,000 of your annual college scholarship is taxable.
- You work part time and earn $3,000 per year.
- Add your taxable scholarship money to your annual income, and you have $18,000 of income to report.
- If you file as a single person in your tax bracket (not that of your parents), this number puts you at a 10 percent tax rate.
- You’ll owe $1,800 in taxes this year.
Keep in mind that although you can pay these taxes in your own bracket, your parents still can claim you as a dependent (as long as you don’t claim any tax exemptions).
Although $1,800 might sound like a lot, even if you owe that much every year and graduate in four years, then you have to pay only $7,200 in taxes on your scholarship money. Compare that to the average student loan debt, which was $37,172 for the class of 2016.
What’s more, you can sign up for a payment plan on your taxes if you need to — and the interest rates on an IRS payment plan likely won’t be nearly as high as student loan interest rates can be.
In the end, if you take on as little student loan debt as possible, you’ll get a much fresher start after college.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|