Where Does Scholarship Money Go?

Scholarships provide financial assistance for higher education costs. Recipients often wonder how these funds are managed and where they are directed. Understanding scholarship disbursement, eligible uses, and tax implications is important for financial planning.

How Scholarship Funds Are Disbursed

Scholarship funds follow various paths to reach their intended purpose, influenced by provider policies and institution practices. Many scholarships are sent directly to the college or university’s financial aid office. These funds are applied to a student’s account, primarily covering tuition, mandatory fees, and potentially on-campus housing or meal plans. Any remaining balance may be refunded to the student or held by the institution for other approved educational expenses.

Some scholarship funds are disbursed directly to the student via check, direct deposit, or prepaid card. This method is common for smaller scholarships or those designated for broader educational needs like living expenses, books, or supplies not directly billed. Students receiving funds directly must apply them towards their education.

A scholarship may also use a hybrid approach, splitting funds between the institution and the student. For example, a portion might cover tuition, while the remainder goes to the student for other costs. The scholarship’s terms and the institution’s financial aid policies dictate the disbursement method and timing, which can range from a lump sum to installments. Students should confirm the disbursement process with their scholarship provider or school’s financial aid office.

Eligible Educational Expenses

Scholarship funds cover specific educational costs, though eligible expenses vary by scholarship terms. Qualified education expenses include tuition and fees for enrollment or attendance. This also extends to books, supplies, and equipment necessary for courses.

For students enrolled at least half-time, scholarship money can also be used for room and board. Other necessary course-related expenses, like laboratory fees or instructional materials, are permissible uses. These differ from personal living expenses not directly tied to educational pursuits.

Scholarships do not cover personal living expenses such as travel, entertainment, or non-required personal care items. These expenditures are non-qualified because they do not directly contribute to the educational process. Individual scholarship providers may impose specific restrictions on fund use, making it crucial for recipients to review the terms carefully. Maintaining detailed records of how scholarship funds are spent is recommended, especially when disbursed directly to the student.

Taxability of Scholarship Funds

The tax treatment of scholarship funds depends on how the money is used and whether services are required for its receipt. Scholarship money is tax-free if used for “qualified education expenses” at an eligible educational institution. The IRS defines qualified education expenses as tuition, fees, books, supplies, and equipment for courses.

Portions of scholarship funds can become taxable if used for non-qualified expenses. This includes amounts spent on room and board, travel, optional fees, or other personal expenses not directly required for enrollment or coursework. For instance, if a student receives a scholarship that explicitly covers living expenses, that portion may be considered taxable income.

Scholarship amounts received for services, such as teaching, research, or other work, are typically taxable. An exception applies if the services are required by a degree program as a condition for receiving the degree. Students may receive Form 1098-T, Tuition Statement, from their educational institution, which reports qualified tuition and related expenses. Students should keep detailed records of all scholarship amounts and education-related expenses to determine taxable income. Consulting IRS publications or a tax professional can provide guidance to avoid unexpected tax liabilities.

Citations

https://www.irs.gov/publications/p970
https://www.irs.gov/taxtopics/tc421
https://www.irs.gov/forms-pubs/about-form-1098-t