FAFSA confusion: Are scholarship funds for housing reported on student's or parent's tax return?

The student reports it! Even if she's your dependent. My son got $$ over tuition last yr too

This is a common confusion point with financial aid. The excess scholarship/grant money used for non-qualified educational expenses (like housing and meals not billed by the school) is technically considered taxable income for the STUDENT, not the parents - even if they're still your dependent. Your daughter should receive a 1098-T form from the college showing the total scholarships/grants and the qualified expenses paid to the institution. The difference is what needs to be reported on her tax return using either Form 1040 or 1040-SR. In terms of impact on future FAFSA, student income is assessed at a higher rate than parent income (50% vs. 22-47% depending on your circumstances), so it can potentially reduce her aid eligibility. However, the student income protection allowance ($7,600 for 2025-2026 FAFSA) may shield some of this income from impacting her SAI calculation.

The financial aid system is DESIGNED to be confusing! They want students to make mistakes so they can deny aid later!!!! My daughter had the EXACT same situation and we reported it wrong, then got AUDITED and had to pay PENALTIES. The schools don't tell you this stuff on purpose. They just want your $$$$.

Yes, your daughter will need to file her own tax return even as your dependent if her income (including the taxable scholarship portion) exceeds the filing threshold. For 2024, that's generally $13,850 for single filers, but even if she's under that, she should file to get any withheld taxes refunded. The taxable scholarship amount gets reported on Form 1040 as part of her gross income (line 1). She should write "SCH" next to the amount to identify it as scholarship income. If she had a job during the year too, she'll need to combine these amounts. Also worth noting: if the money was specifically designated for housing by the scholarship/grant terms, it might not be taxable. Only money without restrictions becomes taxable when used for non-qualified expenses.

my son got a pell grant and bright futures scholarship and we didnt report any of it. his academic advisor said scholarships are tax free? now im worried we messed up

Has anyone actually had to deal with the financial aid office about this? My daughter is in the exact same situation (excess scholarship money for apartment rent) and I've been on hold with the financial aid office for HOURS trying to get clarification. They never pick up and the FAFSA deadline for next year is coming up soon!

i think everyones overthinking this. my daughters gotten excess scholarship money for 3 years and we never reported it anywhere and nobodys ever said anything. the irs has bigger fish to fry lol

One more important point that hasn't been mentioned: For FAFSA purposes under the new FAFSA Simplification Act, scholarships and grants aren't reported as student income anymore. The Department of Education will get this information directly from the college's reporting. However, for tax purposes, the rules remain the same - scholarship/grant money used for non-qualified expenses is taxable to the student and must be reported on their tax return. So while you need to handle this correctly for tax purposes, it won't directly impact your daughter's FAFSA in the same way it did in previous years. The Student Aid Index (SAI) calculation now handles this differently.

wait i thought grants never count as income? pell grants arent taxable right??

This is such a helpful thread! I'm a new college parent dealing with the same situation. My son received a merit scholarship that covered tuition plus an extra $3,000 for "living expenses." Reading through all these responses, it sounds like he'll need to file his own tax return and report that $3,000 as taxable income. Quick question for those who've been through this - does anyone know if state taxes handle scholarship income the same way as federal? We're in California and I'm wondering if there are any state-specific rules we should be aware of. Also, should we be setting aside money for the tax liability on that $3,000, or is it usually a small amount? Thanks everyone for sharing your experiences - this community has been a lifesaver for navigating all these financial aid complexities!

As a parent just starting to navigate this maze, I really appreciate everyone sharing their experiences! My daughter is a freshman and we're dealing with almost the exact same situation - she got about $4,200 in excess scholarship money that went toward her dorm costs. Reading through all these responses, it's clear we need to have her file her own return and report that amount. @Dmitri Volkov your explanations have been incredibly helpful - thank you for taking the time to break down all the details! The distinction between qualified vs non-qualified expenses makes so much more sense now. One follow-up question: since this is her first year filing taxes, should we use tax software or is this complicated enough that we should see a professional? We don't want to mess this up, especially with potential impacts on future aid eligibility. Also really glad to hear from @Dmitri Volkov that the new FAFSA rules mean scholarships won't directly impact the SAI calculation like before - that's a huge relief!

As someone who went through this exact situation last year, I wanted to share what worked for us! My daughter had about $6,000 in excess scholarship money for housing, and after reading through forums like this one, we decided to be very thorough with our approach. Here's what we did: First, we gathered all her financial aid documents (1098-T, scholarship award letters, etc.) and made a spreadsheet tracking every dollar - what went to tuition/fees versus what went to housing/meals. Then we used TaxAct (though TurboTax works too) and carefully followed their scholarship income section. The software actually made it pretty straightforward once we had our numbers organized. For the FAFSA impact - and this might help ease some worries - while her income did go up on paper, the actual effect on her aid package the following year was minimal thanks to the student income protection allowance that @Dmitri Volkov mentioned. She still qualified for most of the same aid. My biggest advice: keep really good records and don't stress too much about getting it perfect. The IRS is more concerned with people trying to hide income completely than students making minor reporting errors on scholarship money. But definitely DO report it - better safe than sorry!

As a CPA who specializes in education tax issues, I wanted to jump in and clarify a few things I've seen in this thread. The advice from @Dmitri Volkov is spot-on - scholarship money used for non-qualified expenses (room, board, personal expenses) is indeed taxable income to the student. One thing I'd add: if your daughter worked during the year and had taxes withheld from her paychecks, she should definitely file a return even if her total income is below the filing threshold. She'll likely get a refund of those withheld taxes. Also, regarding the concern about penalties - the IRS is generally reasonable about honest mistakes on scholarship reporting, especially for first-time filers. What gets them upset is when people don't report income at all, not when students make good-faith efforts to comply but get minor details wrong. For parents just starting this process: create a simple tracking system now. Note which scholarships/grants have restrictions (some specify "tuition only") versus unrestricted awards. This documentation will be invaluable come tax time and can potentially save you money if some awards are truly restricted to qualified expenses. Happy to answer any specific questions about the tax side of things!