What Happens to Scholarship Money You Don’t Use?
Understand what happens to scholarship money you don't use. Get clear guidance on managing surplus education funds and their financial outcomes.
Receiving scholarship funds can significantly ease the financial burden of higher education. However, when the awarded amount exceeds a student’s immediate needs, understanding the regulations governing scholarship money is essential. The way these funds are used carries specific implications that students should be aware of to manage their educational finances effectively.
Defining Qualified Education Expenses
The Internal Revenue Service (IRS) outlines specific criteria for “qualified education expenses.” These are costs that, when paid for by scholarship funds, allow the scholarship to remain tax-free. Qualified expenses include tuition and fees required for enrollment or attendance at an eligible educational institution. This also extends to course-related books, supplies, and equipment required for enrollment or courses at that institution.
An eligible educational institution is any school offering higher education that participates in U.S. Department of Education student aid programs, including most accredited public, non-profit, and for-profit post-secondary institutions. The distinction between qualified and non-qualified expenses is significant for tax purposes. Expenses not considered qualified include room and board, travel, research, and other similar personal expenses, even if the institution requires them.
Tax Implications of Scholarship Funds
Scholarship money is tax-free when a student is a degree candidate at an eligible educational institution and the funds are used for qualified education expenses. This means amounts covering tuition, fees, and required course materials are not subject to income tax. The IRS provides guidance in Publication 970, “Tax Benefits for Education.”
However, scholarship money becomes taxable income when it exceeds the amount used for qualified education expenses or is used for non-qualified expenses. For instance, any portion of a scholarship used for room and board, travel, or optional equipment is taxable. The student is responsible for reporting this taxable portion as gross income on their tax return. Maintaining accurate records of all educational expenses and scholarship amounts received is important to correctly determine the taxable portion.
Managing Unused Scholarship Funds
When scholarship funds exceed a student’s educational charges, the handling of the surplus depends on how the funds were disbursed. If the scholarship amount was sent directly to the educational institution and it surpasses the student’s qualified expenses, the college or university may issue a refund for the surplus. This refund can then be used for other education-related expenses, though any portion not used for qualified expenses would be taxable income.
If scholarship money is disbursed directly to the student, they bear the responsibility for its use. Any amount not spent on qualified educational expenses is taxable income. Students may also be required to return unused scholarship money to the provider under certain conditions, such as withdrawing from school or failing to meet scholarship terms. In such cases, contacting the financial aid office or the scholarship provider directly is the step to initiate the return.
A surplus of scholarship money in one academic year can also impact a student’s eligibility for need-based financial aid in future years. Educational institutions are required to consider all financial aid received, and an overaward may lead to adjustments in future aid packages. This often results in a reduction of loans or work-study programs rather than grants, but students should inform their financial aid office about any outside scholarships received.