For many students, paying for college is a big financial challenge and help is always welcome. Scholarships and grants are kinds of financial aid you may get to help you pay for school. A scholarship or grant is sometimes tax free, but part or all of the money may be taxable. If so, you’ll have to claim it on your taxes.

Scholarships and Grants

Scholarships and grants are sums of money given to students to pay for educational costs. For example, you might receive a Pell grant from the U.S. Department of Education. State agencies also award grants and scholarships. Your school probably has some of its own. Private foundations and even businesses can give out grants and scholarships. For students, scholarship and grant money is an especially good form of financial aid because the money does not have to be repaid like a student loan.

The IRS Rules

Scholarship and grant money is tax free only when it is used for actual educational expenses. For instance, a grant to cover your living expenses but not school costs would not be tax free and you’d have to report it as income on your taxes. Stipends received for teaching, research or other services aren’t scholarships or grants. Your course of study has to consist of courses that provide credit toward a degree, diploma or the equivalent. Schools have to be authorized under federal or state law and accredited by a recognized organization.

Qualified Educational Expenses

Only scholarship and grant money used for things directly related to education is tax free. This includes tuition, fees, books and other school supplies and equipment such as a laptop. Suppose you have a scholarship for $5,000 one semester and your total qualified educational expenses amounts to $4,200. You don’t have to claim the $4,200. However, you do have to report the extra $800 on your taxes. Other costs, such as room and board or travel between your home and college, don’t count as qualified educational expenses.

No Double Dipping Allowed

When you are a student, you or your parents may be able to deduct qualified education expenses on your taxes. However, you can only deduct qualified expenses that you pay for yourself, not those paid for by a scholarship or grant. For example, if a scholarship pays $4,200 and you pay $800 out of your own pocket, you may be able to use $800 as a tax write-off, but not the $4,200.