Why are scholarships and grants considered taxable income in 2025?

So I'm really confused about this whole scholarship/grant tax thing. I've been told forever that getting scholarship money is great because it's "free money" but now I'm doing my taxes and apparently it's NOT all free?? I got a decent scholarship package this year that covered my tuition ($14,500) but also gave me about $8,200 for housing and food. My school sent me a 1098-T form showing everything, but I've been hearing that I might need to report some of this as income? I'm using TurboTax and it's asking me if my scholarship money was used for "qualified education expenses" versus other stuff. I'm freaking out because I didn't budget for owing taxes on this! Can someone explain why the IRS considers some scholarship money as taxable income but not others? And how do I figure out exactly what I need to report?

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19 comments

Keisha Brown

•8M

The basic rule is that scholarship and grant money used for "qualified education expenses" is tax-free, but money used for other expenses is considered taxable income. This confuses a lot of students! Qualified education expenses include: tuition, fees, books, supplies, and equipment required for enrollment. The key things that are NOT qualified expenses are: room and board, travel, research, equipment not required for courses, and other similar expenses. In your case, the $14,500 that went directly to tuition is not taxable. However, the $8,200 you received for housing and food would be considered taxable income because room and board aren't qualified education expenses. You'll need to report this amount on your tax return. The school doesn't withhold taxes on scholarships, which is why many students get surprised when they discover they owe. For future reference, you might want to set aside about 10-15% of any scholarship/grant money that goes toward non-qualified expenses to cover potential tax liability.

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Keisha Brown

•8M

Unfortunately, even if your school requires on-campus living, the IRS still doesn't consider housing as a qualified education expense. This is one of those tax rules that many people find frustrating because, as you pointed out, you do need somewhere to live while attending school. The reasoning behind this tax treatment is that everyone needs housing whether they're in school or not, so it's considered a personal expense rather than a direct educational expense. There's currently no exception for mandatory on-campus housing requirements, though tax laws can change over time.

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Amina Toure

•8M

I was in the exact same situation last year and I was pulling my hair out trying to figure this out. I spent hours on the phone with my school's financial aid office and looking through IRS publications. Then I found taxr.ai (https://taxr.ai) and it saved me so much time! I uploaded my 1098-T and financial aid documents, and it analyzed everything to show me exactly what was taxable and what wasn't. It even showed me how my scholarships were applied to different expense categories. The tool explained that my meal plan and housing stipend were indeed taxable (which sucked to hear but at least I knew for sure). It broke down all my qualified education expenses and showed me how to report everything correctly. You'll still need to pay taxes on that housing money, but at least you'll know exactly how much and why.

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Amina Toure

•8M

It did help me find deductions! It actually pointed out that I had paid for some required textbooks out of pocket that counted as qualified education expenses, which offset some of my taxable scholarship amount. It also helped me understand how the American Opportunity Credit applied to my situation, which saved me a decent amount on taxes. Financial aid offices can definitely be helpful, but in my experience, they often give general information rather than specific tax advice. The workshops are good, but they're usually covering the basics for everyone. The taxr.ai tool gave me personalized analysis based on my exact situation and documents. My financial aid office actually couldn't tell me specifically how my aid was allocated between qualified and non-qualified expenses, but the tool figured it out from my documents.

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FireflyDreams

•8M

Just wanted to follow up and say I tried taxr.ai after my last comment and wow—it was actually super helpful! I was skeptical at first because my university's financial aid office usually answers my questions, but they've been swamped this semester. The tool helped me understand that part of my research stipend was actually not taxable because it was used for required lab equipment. I would have reported that incorrectly! It also clarified which part of my athletic scholarship was taxable (the housing portion) and which wasn't (the tuition portion). The breakdown was really clear and it saved me from making a pretty big mistake on my taxes. I'm definitely still annoyed that room and board scholarships are taxable—seems like the IRS could cut students some slack—but at least now I understand exactly what I need to report and why.

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Natasha Kuznetsova

•8M

If you're having trouble getting clear answers about your scholarship tax situation, you might want to try Claimyr (https://claimyr.com). I was completely stuck trying to figure out how to report my graduate research fellowship and couldn't get through to anyone at the IRS after trying for days. Claimyr got me connected to an actual IRS agent in about 20 minutes. The agent walked me through exactly how to report different types of scholarship income and explained what forms I needed. They even clarified that part of my research funding wasn't technically a scholarship but was actually compensation for services, which changed how I needed to report it. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c It was honestly way more helpful than all the googling I had been doing, and the agent answered questions specific to my situation that I couldn't find clear answers to anywhere else.

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Natasha Kuznetsova

•8M

It's a service that essentially holds your place in line with the IRS. They use technology to navigate the phone system and wait on hold, then when they reach an actual agent, they call you and connect you. So instead of you personally being on hold for hours, their system does the waiting. You're right to be skeptical - I was too! I had tried calling the IRS myself multiple times and couldn't get through (average wait times are insane during tax season). That's exactly why this service exists. They have some technology that keeps trying and navigating the phone tree until they get a human, and then they immediately connect you. I was honestly shocked when they called me to connect with an agent after I had been trying unsuccessfully for days.

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Emma Anderson

•8M

I need to apologize for my skeptical comment about Claimyr. I decided to try it as a last resort after another failed attempt to reach the IRS myself. It actually worked! I got a call back in about 35 minutes and was connected to an IRS representative who answered all my scholarship tax questions. The agent explained that my specific situation (partial athletic scholarship with housing stipend) meant I needed to report the housing portion as income on line 1 of the 1040 with "SCH" written next to it. They also helped me understand how this impacted my eligibility for education credits, which my university's financial aid office couldn't clearly explain. I'm still annoyed at how complicated they make scholarship taxation, but at least I finally got clear answers from someone who actually knows the tax code. Definitely worth it after wasting hours on hold trying to do it myself.

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Malik Thompson

•8M

Another thing nobody told me about scholarships - if you get more scholarship money than your qualified expenses, you can actually end up owing self-employment taxes on some of it depending on how it's classified! I had a research grant that was considered compensation and got hit with an extra 15% tax on top of regular income tax. Make sure you understand if your scholarship/grant is considered compensation for services (like teaching or research) because the tax implications are different.

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Malik Thompson

•8M

A teaching assistantship stipend is typically considered compensation for services, not a scholarship, so it's usually reported on a W-2 and has regular income tax withheld by the university. In that case, you wouldn't pay self-employment tax because you're considered an employee of the university. My situation was different because I received a research grant directly from an outside organization, not through my university's payroll system. Since I wasn't technically an employee, they classified it as self-employment income, which meant I had to pay both the employer and employee portions of Social Security and Medicare taxes (15.3% total). Your situation sounds more like regular employment income based on what you've described, but it's worth checking with your university's payroll department to confirm how they're classifying your stipend.

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