Do you know the difference between a scholarship, grant and fellowship? Are you aware of the tax statuses of scholarships, grant and fellowship funding? It’s important to know the differences between the types of award funding, along with any government regulations applied to student award funds. Luckily, the majority of scholarships, fellowships and grants have built-in stipulations that require the funds to be applied to qualified expenses. However, like it or not, some so-called “free money” is taxable and it’s important for students to understand the differences between the types of awards, as well as the qualifications for taxation. First, the differences between the types of awards: Scholarships are funds gifted to students studying for a degree, usually to be applied towards the student’s educational endeavors. Scholarships do not require repayment by the student, though some sort of an application process is usually necessary. There are scholarships for students of all ages – from kindergarten through graduate school. Grants are usually funds awarded to students deemed eligible by specific criteria, many based on financial-need and are usually given by government entities. Grants usually don’t require repayment by the student. Fellowships are funds given to benefit a student’s studies or research endeavors. All of the above options are generally considered to be “free money,” which is true – as long as it’s tax exempt. It’s important to remember that such awarded funds are only tax exempt if the student is studying towards a degree within an eligible educational institution. If the award recipient is not in pursuit of a degree, the award funds can be taxable. Both athletic and academic scholarships are, in fact, taxable unless otherwise exempt for other reasons. It also matters what the award money is spent on. There are qualified and unqualified expenses, when it comes to taxable funding. Qualified expenses include tuition, fees, equipment such as books and supplies that are required by the educational institution. Unqualified expenses include room and board, travel, research, equipment and supplies that are not required by the education institution. Even if you have to work to earn the funding, such as with a fellowship, your funding is likely still liable to be taxed. It’s essential to keep documentation and records of any scholarships, grants or fellowships given as funding for your educational endeavors. Even if you aren't required to pay taxes on your awards, you should always claim them on your federal income tax return since schools aren't required to report them unless some sort of service is performed for the funding. To learn more about what is or is not eligible, read Should I Claim Scholarships & Other Awards on My Taxes? Always know your options in terms of funding - but be aware of the rules and regulations that accompany “free money.” Do you think it’s wrong for the government to tax educational funding?