If a scholarship or fellowship is used for expenses that do not qualify for tax-free purposes, the individual has received a nonqualified scholarship or fellowship, which is taxable.
A nonqualified scholarship/fellowship is income the student receives that is above the cost of qualified education expenses (required tuition, fees, books, supplies, and equipment). Nonqualified income is normally used for the following nonqualified education expenses:
- Room and board
- Clerical help
- Equipment not required for the course
- Other expenses that are not required for enrollment in or attendance at an eligible educational institution
- Foreign National Tax Compliance, University Controller’s Office
- IRS Topic No. 421, Scholarships, Fellowship Grants, and Other Grants