Can You Use Scholarship Money to Buy a Car?

Scholarships provide financial assistance to students pursuing higher education. They help alleviate the monetary burdens associated with academic pursuits and cover various costs during their studies.

Understanding Qualified Education Expenses

The Internal Revenue Service (IRS) defines “qualified education expenses” for tax purposes, which determine if scholarship money is tax-free. These expenses include tuition and fees required for enrollment or attendance at an eligible educational institution. Funds used for these academic costs are not considered taxable income.

Qualified expenses also include course-related materials like books, supplies, and equipment. These items must be required for enrollment or attendance at the institution or for specific courses. For example, a mandatory textbook is a qualified expense, but an optional study guide is not. This ensures tax-free scholarship funds apply to necessary academic components.

Non-Qualified Expenses and Tax Implications

Using scholarship money to purchase a car is not considered a qualified education expense by the IRS. Expenses like vehicle purchases, travel, and personal living costs are non-qualified. Any portion of a scholarship used for such items becomes taxable income for the student.

When scholarship funds exceed qualified education expenses, the excess amount used for non-qualified purposes, including a car, must be reported as taxable income. This income is included on the student’s tax return, potentially increasing their tax liability. While educational institutions issue Form 1098-T to report tuition payments and scholarships, students are responsible for tracking and reporting taxable scholarship amounts.

Scholarship Disbursement and Institutional Policies

Scholarship funds are typically disbursed through the educational institution. The scholarship provider sends funds directly to the college or university. The institution then applies these funds to the student’s account to cover qualified expenses such as tuition, fees, and sometimes room and board if directly billed by the school.

After institutional charges are settled, any remaining scholarship balance is usually released to the student. This remaining amount may be issued via direct deposit or a check. While the IRS sets guidelines for tax-free scholarship use, individual educational institutions or scholarship organizations may impose their own rules on how funds can be utilized. Students should consult their school’s financial aid office or the scholarship provider for guidelines regarding permissible uses and any restrictions, especially for non-traditional expenses like a vehicle purchase.