Financial Aid Implications:
Adjustment of Aid Packages: Receiving an outside scholarship may lead to a reduction in other financial aid. Federal regulations mandate that total aid cannot exceed the cost of attendance. Consequently, institutions may adjust their aid packages by reducing loans, grants, or work-study funds. studentaid.gov
Tax Implications:
Tax-Free Scholarships: Scholarships are tax-free if they are used for qualified education expenses, such as tuition, fees, books, supplies, and equipment required for courses. The recipient must be a degree candidate at an eligible institution.
Taxable Scholarships: Funds used for non-qualified expenses, including room and board, travel, and optional equipment, are taxable. Additionally, any portion of a scholarship that represents payment for teaching, research, or other services is taxable, unless it is part of a comprehensive student aid program.
For detailed information, refer to IRS Publication 970, "Tax Benefits for Education," which provides comprehensive guidance on the tax treatment of scholarships and other educational assistance.
By understanding these guidelines, students can maximize their financial aid benefits and ensure compliance with tax regulations.