What Happens to Leftover Scholarship Money?

Scholarship money helps cover higher education costs. Sometimes, the total amount of scholarships and other financial aid exceeds a student’s direct charges from their educational institution, such as tuition and fees. This surplus is known as “leftover scholarship money.” Understanding how these excess funds are managed and their potential tax implications is important for students and their families.

How Institutions Process Excess Funds

Educational institutions typically apply scholarship funds directly to a student’s account to cover tuition and mandatory fees first. Any remaining balance after these direct institutional charges are paid becomes the “excess” amount. This process ensures primary educational costs are settled before any remaining funds are released to the student.

Common methods for disbursing these excess funds include direct deposit into a student’s bank account or mailing a physical check. Some institutions may also offer the option to retain the credit balance on the student’s account to be applied toward future academic terms. The method of disbursement can vary between schools and may depend on the specific scholarship provider’s rules.

Disbursement of excess funds usually occurs after the academic term’s official add/drop period. Many institutions aim to disburse these funds within 14 days of the credit appearing on the student’s account or the start of the term. However, timing can fluctuate based on the institution’s policies and financial aid processing schedules.

Qualifying Expenses for Scholarship Funds

The Internal Revenue Service (IRS) defines specific “qualified education expenses” for scholarship funds, which is an important distinction for tax purposes. These expenses generally include tuition and fees required for enrollment or attendance at an eligible educational institution. Additionally, the cost of books, supplies, and equipment specifically required for courses are considered qualified expenses.

Conversely, many expenses are not considered qualified by the IRS, even if necessary for a student’s attendance. These non-qualified expenses typically include room and board, travel costs, and other personal living expenses. Optional fees, research expenses, and equipment not explicitly required for a course also fall into this category. This distinction is primarily for federal income tax purposes and might differ from what a scholarship provider allows.

Taxation of Scholarship Funds

Scholarship money used solely for qualified education expenses is generally considered tax-free. This tax-exempt status applies to amounts spent on tuition, fees, books, and supplies, provided these items are required for enrollment or coursework. The student must also be a candidate for a degree at an eligible educational institution for the scholarship to be tax-free.

Any portion of a scholarship that is used for non-qualified expenses, such as room and board, travel, or other personal costs, is considered taxable income. This taxable amount must be reported on the student’s federal income tax return on Form 1040 as “other income.”

Educational institutions issue Form 1098-T, Tuition Statement, which reports qualified tuition and related expenses, as well as scholarship amounts received. This form does not calculate the taxable portion of a scholarship; students are responsible for determining and reporting any taxable amounts themselves. State tax rules can vary regarding the taxability of scholarship income, so individuals should consult their state’s tax regulations for specific guidance.