What Can I Use Scholarship Money For?

Scholarships are a valuable form of financial aid designed to support students in pursuing their educational aspirations. Understanding the precise rules governing scholarship usage is crucial. Misapplying these funds can lead to unexpected tax liabilities and negate some of the scholarship’s benefits. This article clarifies how scholarship funds can be utilized to maximize their intended purpose.

Understanding Qualified Educational Expenses

The Internal Revenue Service (IRS) defines specific categories of expenses as “qualified educational expenses” for tax purposes. Funds used for these purposes are generally considered tax-free. Primary qualified expenses include tuition and fees required for enrollment or attendance at an eligible educational institution. These are the costs directly charged by the school for your courses.

Beyond tuition and fees, the cost of books, supplies, and equipment required for your courses also fall under qualified expenses. For instance, if a specific textbook or software is mandated for a class, its cost can be covered by scholarship funds without tax implications. These items must be required for the course of study, not merely recommended or for personal convenience. To be qualified, the student must be a degree candidate attending an eligible educational institution. An eligible institution is any accredited public, nonprofit, or for-profit post-secondary institution eligible to participate in student aid programs administered by the Department of Education.

Identifying Non-Qualified Expenses

Certain expenses are not considered qualified educational expenses by the IRS, and using scholarship funds for these items can have tax consequences. Room and board, for example, are not qualified expenses, even if paid directly to the educational institution. This includes rent for off-campus housing or charges for on-campus dormitories and meal plans.

Other non-qualified expenses include travel costs, such as commuting to and from school, and personal living expenses like laundry or entertainment. Expenses for sports, games, hobbies, or non-credit courses are also not qualified, unless these activities are part of the student’s degree program. If an expense does not directly relate to the academic requirements of enrollment or attendance, it is considered non-qualified.

Tax Considerations for Scholarship Money

The tax treatment of scholarship money depends on how the funds are used. If a scholarship is used exclusively for qualified educational expenses, such as tuition, required fees, books, and supplies, it is generally considered tax-free income. This applies to degree-seeking students attending an eligible educational institution.

Any portion of a scholarship used for non-qualified expenses becomes taxable income. For example, if a scholarship covers tuition but also provides funds for living expenses, that amount is subject to income tax. Scholarships requiring the recipient to perform services, such as teaching or research, are considered taxable income, even if used for qualified educational expenses. This is because such scholarships are viewed as compensation for work performed. Maintaining meticulous records of all scholarship funds received and how they were spent is important for accurate tax reporting.

Practical Management of Scholarship Funds

Effective management of scholarship funds begins with understanding how the money is disbursed. Some scholarships are sent directly to the educational institution to cover tuition and fees, while others are disbursed directly to the student. Knowing the disbursement method helps in planning how and when funds will be available.

Creating a detailed budget is a practical step to prioritize the use of scholarship funds. Students should allocate funds to qualified educational expenses first, ensuring tuition, fees, and required course materials are covered. Any remaining funds can then be budgeted for non-qualified expenses, with the understanding that these portions may be taxable. Maintaining thorough records of all expenses paid with scholarship money is important, including receipts for books and supplies and tuition statements. These records are invaluable for tax purposes and tracking overall educational expenditures. Communicating with the financial aid office at your institution can provide clarity on specific scholarship terms, disbursement policies, and institutional guidelines for fund usage.