Scholarships can make a long-held dream of attending college possible.
Some 53 percent of students say scholarship money plays an important role in whether they’ll attend college or continue in their degree program, according to a 2026 survey from polling firm Gallup.
But that dream comes with tax strings attached if recipients aren’t smart about how they spend the money, said David Perez, CEO of tax preparation site Tax Maverick.
“Most college scholarships are not taxable, but there is an important catch,” Perez told The Independent via email. “It isn't the scholarship that determines whether you owe tax. It's how the money is used.”
Knowing how to use scholarship money in a tax-free way is critical to avoiding a surprise tax bill.
Two ways to be tax-free
Scholarships aren’t taxed as long as they meet two conditions, according to the Internal Revenue Service:
- The school awarding the scholarship does all the typical college things: awards degrees, has regular faculty members and curriculum, and has a student body that’s consistently enrolled at the college.
- The scholarship money is spent on tuition, fees, books, supplies and equipment that the college requires.
Generally speaking, most accredited universities meet the IRS’s standard for a qualifying school - that can include public, nonprofit and privately owned for-profit institutions, according to the IRS.
Qualifying spending can be trickier, because many purchases may seem necessary for college but aren’t required by the university, and vice versa.
For example, the University of Nebraska’s medical center requires all medical students to have a personal stethoscope. Therefore, scholarship money used to purchase a stethoscope qualifies because the equipment is required.
Room and board is another area that could trip up students and families. In most cases, spending a scholarship on rent or room fees is nontaxable if the college requires living on or near campus.
Examples of colleges that require students to live on campus their first year include The Ohio State University, University of Connecticut, Vanderbilt University and Washington State University, according to college and career informational site Bestcolleges.com.
When it’s time to pay
Any school or expense that doesn’t meet the IRS’s two requirements for tax-free scholarship spending will likely be treated as taxable income.
So, if the college awarding the scholarship doesn’t have regular staff, curriculum and student body, and doesn’t award degrees, there’s a good chance any scholarship money spent to attend - that includes tuition - is treated as taxable income.
Examples of unaccredited online universities operating in multiple states include the following, according to online college rankings and rating site GetEducated:
- Americal Capital
- Amstead
- Ashwood
- Belford
- Colton State
- Glendale
- Hartford
- Hill
- Lorenz
- Novus
- Sacramento International
- St. Clements
- Washington International
- Westwood.
The second group of scholarship uses that are at risk of being taxable income are school expenses. Any purchase the school doesn’t require is likely a nontaxable cost, according to the IRS.
A good example of this is room and board - in most cases, scholarship money used for living expenses must be reported as taxable income unless the college requires students to live on campus.
Equipment can be another confusing area for students. If a college requires students to have their own laptop, then scholarship money spent on a computer isn’t taxable.
If a student buys a laptop for college because the university recommends it but doesn’t require it, scholarship money used for the purchase is likely taxable.
Another situation where taxes might be due is when a scholarship is paid in exchange for services, such as teaching or research, Perez said.
There are exceptions to the rule, though, the IRS notes. Students who received scholarship money for services required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a work or service program that meets a set of six specific requirements.
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