Are college scholarships really tax-free? - (4/1/2026)
Paying for college often requires a mix of savings, loans and financial aid. Although scholarships can significantly ease the burden, some portions of these awards may come with unexpected tax implications.
Generally, scholarships received by degree candidates are tax-free to the extent they’re used for qualified tuition and related expenses. These include tuition, mandatory fees and required books, supplies and equipment. Amounts used for nonqualified expenses — such as room and board or travel — are taxable.
Suppose your child receives an $80,000 scholarship that provides $60,000 for tuition and required expenses and $20,000 for housing. The $60,000 is tax-free, but the $20,000 is taxable.
If a scholarship requires the student to perform services, such as teaching or research, the portion paid for those services must be reported as income and is generally taxable. However, exceptions apply.
Awards from programs such as the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, and certain other programs are generally tax-free.
Additionally, graduate students who receive tuition reductions in exchange for teaching or research activities needn’t report these benefits as income. Also, tuition reductions enjoyed by an educational organization’s employees or their family members are generally tax-free.
Any taxable portion of a scholarship must be reported on the student’s return. If it’s not attributable to payment for services, it might trigger the “kiddie tax,” meaning unearned income above a certain threshold is taxed at the parents’ tax rate. Understanding the rules is essential. Contact us with questions.
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