Are Scholarships Unearned Income?

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Are Scholarships Unearned Income? Complete 2025 Guide for Students and Parents

As higher education costs continue to rise, scholarships provide much-needed financial relief for millions of students. But when tax season rolls around, many students and their parents start asking critical financial questions:

Is a scholarship considered unearned income? Do I need to report it? Will it affect my tax liability or eligibility for other benefits?

In this comprehensive 2025 guide, we break down the concept of unearned income, how scholarships fit into that classification, what the IRS expects, and how to stay compliant while maximizing your education funding.

Whether you’re a high school student, a college applicant, a graduate student, or a parent managing finances, this article will answer your most pressing questions about scholarships and unearned income.

What Is Unearned Income?

Before determining if scholarships fall into this category, let’s clarify what unearned income means.

According to the IRS, unearned income is income that is not earned through work or active participation. This includes:

  • Interest and dividends
  • Capital gains
  • Rental income
  • Social Security benefits
  • Inheritance
  • Unemployment benefits
  • Pensions
  • Trust distributions
  • Alimony (in some cases)

These sources generate income without requiring labor or services from the recipient.

Earned Income vs. Unearned Income

Now the critical question arises: where do scholarships fit in this classification?

Are Scholarships Considered Unearned Income?

The Short Answer:

Yes and No.

  • Scholarships for qualified education expenses are not considered income at all—neither earned nor unearned.
  • Scholarships used for non-qualified expenses (like room, board, or travel) are considered taxable income—and fall under unearned income.

Let’s break this down.

What Are Qualified vs. Non-Qualified Education Expenses?

To determine whether scholarship money counts as unearned income, we must identify how the money is used.

Qualified Education Expenses:

These expenses are not taxed and not considered income.

  • Tuition
  • Required enrollment fees
  • Required textbooks
  • Supplies and equipment mandated by your school

Non-Qualified Education Expenses:

These are not exempt from tax and may be classified as unearned income.

  • Room and board
  • Travel and transportation
  • Research not required for enrollment
  • Health insurance
  • Optional materials and supplies
  • Meals and personal expenses

Important

Only the portion of the scholarship used for non-qualified expenses is considered unearned income.

Example Scenarios

Scenario 1:

Emma receives a $15,000 scholarship.

  • She spends $12,000 on tuition and required books.
  • She spends $3,000 on housing.

Tax Implication:
The $12,000 is non-taxable and not income.
The $3,000 used for housing is taxable unearned income.

Scenario 2:

Jayden receives a fellowship stipend of $20,000 for graduate school.

  • He uses $10,000 on tuition.
  • $10,000 is paid to him monthly for living expenses.

Tax Implication:
The $10,000 stipend is taxable unearned income.

IRS Guidelines for Scholarships as Income

The IRS outlines scholarship taxation in Publication 970: Tax Benefits for Education.

According to the IRS:

“A scholarship or fellowship grant is not taxable if you are a candidate for a degree at an eligible educational institution and use the scholarship for qualified education expenses.”

If not, it becomes taxable income, and unless tied to a job or services performed, it is considered unearned.

When Is a Scholarship Considered Earned Income?

If a scholarship requires you to work in exchange for funds (e.g., teaching assistant, lab assistant), the portion related to work is considered earned income.

You may receive:

  • A W-2 form
  • Be required to file taxes as an employee

Key Rule:

If you work for the scholarship, it’s earned income.
If the scholarship is a gift or grant with no services required, and it goes to non-qualified expenses, it’s unearned income.

Why Does Unearned Income Matter?

Understanding this classification is vital for several reasons:

Tax Filing Requirements

Students who are dependents and earn more than $1,300 in unearned income in 2025 must file their own federal tax return.

Kiddie Tax Rules

Unearned income over $2,500 (2025 threshold) may be taxed at the parent’s higher marginal tax rate.

Financial Aid Calculations

Some forms of unearned income may reduce your eligibility for federal student aid.

Eligibility for Other Benefits

Receiving unearned income can impact your eligibility for:

  • Medicaid
  • Supplemental Security Income (SSI)
  • Certain housing assistance programs

How to Report Scholarship Income

If part of your scholarship is taxable unearned income:

  • Report it on Form 1040, Line 1, with the label “SCH.”
  • If you received a 1098-T form from your school, use it to determine scholarship totals and expenses paid.
  • Use Schedule 1 if you are self-employed or receive additional income.

Common Mistakes Students Make

Not Reporting Taxable Scholarship Money

Students often assume all scholarship funds are tax-free. This can lead to IRS penalties.

Misclassifying Fellowship Stipends

Monthly stipends may be seen as living assistance but are still taxable unearned income.

Overlooking IRS Filing Thresholds

Even if you earn no wages, too much unearned income means you must file.

Scholarships and FAFSA: Are They Counted as Income?

Scholarships are not considered taxable earned or unearned income on the FAFSA.

However, they are reported in a separate field and may reduce your eligibility for need-based aid.

How to Legally Reduce Scholarship Tax Liability

Use scholarships for tuition and fees first.

  • Keep records of every expense.
  • Avoid using scholarships for room and board if avoidable.
  • Consult a tax professional, especially if you receive fellowships or large awards.
  • Understand your filing requirements.

Are Scholarships Reported to the IRS?

Yes. If you receive more than $600 in taxable scholarship money (e.g., stipends), you may receive:

  • Form 1099-MISC
  • Form W-2 (if it was work-related)

Are Scholarships Taxed the Same in Every State?

No. State tax laws vary.

Example:

  • California generally follows federal guidelines.
  • New York may tax certain forms of unearned income.

Check your state’s Department of Revenue for local rules.

International Students: Are Scholarships Unearned Income?

For nonresident alien students:

  • Most scholarships for non-qualified expenses are taxed at a 14% flat rate.
  • Tax treaties between your country and the U.S. may reduce or eliminate this tax.
  • File Form 1040-NR and Form 8843.
  • Use Form W-8BEN to claim tax treaty benefits.

Final Summary

Scholarship Use Income Type Taxable?
Tuition Not Income No
Required books and supplies Not Income No
Room and board Unearned Income Yes
Travel and personal expenses Unearned Income Yes
Teaching assistantship Earned Income Yes
Fellowship living stipend Unearned Income Yes

Key Takeaways

  • Scholarships used for qualified educational expenses are not income.
  • Scholarships used for non-qualified expenses are unearned income and may be taxed.
  • If services (e.g., work) are required for the scholarship, it’s earned income.
  • Track all expenses, report taxable portions accurately, and consult tax experts when needed.