Paying Qualified Education Expenses with Grants or Scholarships

A scholarship, fellowship, and Pell Grant are all tax-free benefits if paid for an eligible student at an eligible institution. 

A scholarship is generally an amount paid or allowed for the benefit of an undergraduate or graduate student at an eligible institution to assist in studies. A fellowship is generally an amount paid for an individual to assist with research or studies.   
 

You may have the following questions………..

• Qualifying expenses paid with grant money. Does this prevent me from qualifying for education credits?
• If college tuition was paid for with grants and scholarships, do I qualify for education deductions?
• I went to college on a FAFSA. Do I qualify for an education deduction?
   

When you pay for qualifying education expenses with certain tax-free funds you cannot claim an education credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance, such as a scholarship or grant.

Wondering what classifies as qualified education expenses? Click on What Are Qualified Education Expenses?

If a grant or scholarship meets the qualification of being tax-free then you do not qualify for the education deduction.

A scholarship or grant is tax-free if you meet the following qualifications:

• You are a candidate for a degree at a primary or secondary school or are pursuing a degree at a college or university, and
• You use the scholarship, grant, or fellowship to pay qualified education expenses.
• You attend an accredited educational institution that is authorized to provide a program that is acceptable for full credit toward a bachelor’s or higher degree or a program training to prepare students for gainful employment in a recognized field.
   

Federal assistance or Pell Grants are treated as scholarships for the purposes of determining their tax treatment.

Thus, there is no double benefit allowed when college expenses are paid with federal student aid and you are not allowed to claim any education deductions credits, as these benefits are tax-free educational assistance if the student meets the eligibility qualifications.

If qualified education expenses are paid with tax-free funds, you must reduce the qualified education expenses by any tax-free educational assistance and refund you received.