Scholarship Impacts On Taxes and Other Financial Aid
Students and their parents should learn how scholarships could affect the financial aid packages that may be offered by schools as well as the legal requirements for reporting scholarships. It is also important know the conditions under which scholarship money will be taxed.
Scholarships and Other Financial Aid
Scholarships can be a big help in paying for college, but for some students, the benefit may not be as advantageous as desired. By law, scholarships are considered a financial resource (just like savings are) and could affect any needs-based aid that a school has already awarded. Needs-based aid includes federal grants, subsidized loans or work-study and any school-based grants. Each school has their own “outside scholarship policy” that defines how needs-based aid will be reduced as a result of an outside scholarship. Thus, if a school’s policy is to always reduce loans first, a scholarship will help reduce the amount of money that needs to be borrowed. But, if a school reduces grant money first, the net effect of the scholarship could be zero if the scholarship is not larger than the grant. Each situation and school is different so students should contact the financial aid offices of the school’s they have applied to, to get detailed information.
For students who don’t receive any needs-based financial aid from the school or government, scholarships are a great way to reduce the amount of money borrowed through the Stafford loan program, PLUS loan program and/or private loans.
Although it may seem easy to hide scholarship money from a school, this is illegal and could result in the loss of eligibility for any future federal student aid. Students are required to send a copy of the scholarship award letter and a copy of the check, if it was sent to the student rather than the school.
Scholarships and Taxes
The money obtained from scholarships is usually tax-free if the student is a candidate for a degree at an eligible institution. The award must be used to pay for tuition, fees, books, supplies or equipment in order to be tax-free. Award money that is used to pay for room and board, travel, research, clerical help or equipment not required for the course is all taxable.
Tuition reductions, such as free or reduced tuition for an employee of a school, are generally tax-free. For graduate students, a tuition reduction is tax-free only if they do research or teach at the school.
For more information about taxes in regards to college expenses, see BrainTrack’s article: “Higher Education Tax Benefits”.
Scholarship Impact Tips
- Send scholarship information - Copies of scholarship awards and checks must always be sent to the college’s financial aid office.
- Contact Financial Aid Offices – Students who expect to receive needs-based awards should contact financial aid offices to find out their “Outside Scholarship Policy”.
- Rely on a tax consultant – If unsure about how to minimize the tax impact of scholarship money and other financial aid, it is best to turn to an expert.
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