Can You Use Scholarship Money for Anything?

Scholarships represent a significant financial aid resource for students pursuing higher education. While these funds can substantially reduce the cost of college, their use is not always without restrictions. Understanding what scholarship money can and cannot be used for involves navigating both tax implications set by the Internal Revenue Service (IRS) and specific rules established by scholarship providers. This article clarifies these parameters, offering insight into the permissible uses of scholarship funds.

Qualified Education Expenses

The Internal Revenue Service (IRS) defines what constitutes “qualified education expenses” for tax purposes. These are generally amounts paid for tuition, fees, and other related expenses that are specifically required for enrollment or attendance at an eligible educational institution. An eligible educational institution includes most accredited public, nonprofit, and proprietary postsecondary schools offering degrees or other recognized educational credentials.

Common examples of qualified expenses include tuition and fees. These are the direct costs of instruction and any fees that must be paid to the institution as a condition of enrollment or attendance. For example, if a university mandates a technology fee or a student activity fee for all enrolled students, these would typically be considered qualified.

Additionally, the cost of books, supplies, and equipment required for enrollment or attendance at the eligible educational institution can qualify. This means items like specific textbooks for a chemistry course, a graphing calculator for an engineering program, or particular art supplies for an art major would be qualified if the institution or course explicitly requires them. The distinction is whether the item is directly necessary for the academic program or simply a general living expense. Guidance on these definitions is detailed in IRS Publication 970, “Tax Benefits for Education.”

Non-Qualified Expenses

Certain expenses are generally not considered “qualified education expenses” by the IRS for purposes of tax-free scholarship treatment, even if they are necessary for a student’s daily life. These typically include costs that are not directly required for enrollment or attendance at the educational institution.

Room and board, which encompasses housing and meal costs, is a common example of a non-qualified expense. These living costs are not viewed as directly tied to the act of enrollment or the curriculum itself. Similarly, expenses related to transportation, such as commuting costs to campus or travel during academic breaks, are not qualified.

Other personal living expenses also fall into the non-qualified category. This broad group includes costs for laundry, entertainment, personal care items, and other discretionary spending. Research expenses, if not explicitly required by the institution as a condition of enrollment or attendance, are also typically non-qualified.

Scholarship money can often be used to cover these non-qualified items. However, using scholarship funds for these purposes usually results in tax implications for the recipient. The portion of the scholarship used for non-qualified expenses may be considered taxable income. The IRS distinction focuses on what the institution requires for education, not on what a student might need for daily living.

Tax Treatment of Scholarship Funds

The tax implications of receiving scholarship funds depend on how the money is ultimately utilized. Scholarship money used exclusively for qualified education expenses is generally considered tax-free income. This portion of the scholarship does not typically need to be included in the student’s gross income for federal income tax calculations. This tax-free status applies to degree candidates attending eligible educational institutions.

Conversely, any portion of a scholarship or fellowship grant that is not used for qualified education expenses is generally considered taxable income. This includes amounts spent on non-qualified expenses such as room and board, travel, or other personal living costs. For instance, if a student receives a $20,000 scholarship and uses $12,000 for tuition and required books, but the remaining $8,000 covers housing and food, that $8,000 is typically taxable.

The taxable amount of a scholarship must be reported as income. This amount is reported on Form 1040. Students are generally responsible for tracking how their scholarship funds are used and determining the taxable portion, as they may not receive a Form W-2 or 1099-MISC for these specific payments.

Educational institutions often provide Form 1098-T, Tuition Statement, which reports tuition payments received and scholarships applied to the student’s account. However, this form might not reflect the full scholarship amount or how the student ultimately allocated the funds. Students should maintain detailed records of their expenses and scholarship disbursements to accurately determine any taxable income. The tax liability on the taxable portion of a scholarship will depend on the student’s overall income and applicable tax bracket.

Scholarship Grantor Terms and Conditions

Beyond the federal tax rules established by the IRS, individual scholarship providers, referred to as grantors, often impose their own specific terms and conditions on how their funds can be used. These grantor-specific rules can be more restrictive than general IRS guidelines for tax-free treatment. For example, a particular scholarship might explicitly state that its funds can only be applied to tuition and fees, even if the IRS would allow for required books and supplies to be covered tax-free.

Grantor conditions vary widely depending on the scholarship’s purpose and the donor’s intent. Some scholarships may require funds to be used for a specific major or field of study, such as a scholarship designated solely for students pursuing a degree in a particular science. Others might specify that the funds must be utilized at a particular institution or type of educational institution.

In some cases, grantors might permit the use of funds for broader academic-related costs that are not typically considered qualified expenses by the IRS. This could include specific research materials, specialized software licenses relevant to a project, or even attendance at academic conferences related to the student’s program of study. These allowances are determined solely by the grantor’s agreement.

Scholarship recipients must thoroughly read and understand the specific agreement or award letter provided by each scholarship grantor. This document details the permissible uses of the funds, any ongoing academic requirements, and the consequences of failing to adhere to these terms. Consequences can include forfeiture of the scholarship or a requirement to repay funds. Compliance with these grantor terms is a distinct obligation separate from tax compliance and is directly tied to maintaining eligibility for the scholarship award itself.