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 2019!
|* 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.
1 Important Disclosures for College Ave.
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.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 9/3/2019. Variable interest rates may increase after consummation.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of October 1, 2019, the one-month LIBOR rate is 2.05%. Variable interest rates range from 3.15% – 11.41% (3.15% – 11.26% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Citizens Bank Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank- participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
|3.70% – 11.98%1||Undergraduate, Graduate, and Parents|
|3.25% – 10.65%*,2||Undergraduate and Graduate|
|3.37% – 11.87%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|3.15% – 11.41%5||Undergraduate and Graduate|