There’s nothing like your first-ever paycheck to teach you about the reality of taxes. And as we get older, the many ways our money goes to the government become even more apparent.

But what about college scholarships? Surely the money you received to pay for your education can’t be taxed, right? The truth is, it could be.

To find out if this could happen to you, check out the information below and see which rules apply to your college awards and whether your scholarships are taxable income.

Are scholarships taxable? It depends

So, are scholarships taxable income? The answer lies in what type of scholarship you have. Below are the tax implications for college scholarships, as explained by the IRS.

Scholarships covering tuition at an eligible educational institution: not taxable

According to the IRS, an “eligible educational institution” is defined as follows:

  • The main purpose is formal instruction.
  • It regularly maintains a faculty and curriculum.
  • It normally has an enrolled student base where it performs instruction.

Additionally, you must be a candidate for a degree at such an institution. That means your school has to offer the credits necessary to get that degree. That said, schools offering a training program for a “recognized occupation” can also qualify for tax-free scholarships, so it’s best to check with the school in question if you think you fall into this category.

If your school fits this description, then your tuition scholarship isn’t taxable. But the funds need to meet a few other criteria.

If you use your scholarship for expenses other than tuition, such as room and board, it might be taxable. Likewise for payment for services you agree to do for the scholarship, such as teaching or conducting research.

Scholarships covering non-eligible educational institutions: taxable

If you’re thinking of using scholarship money to take classes for fun, you might want to reconsider if you don’t want to pay taxes on your college scholarship.

According to the IRS, “a scholarship or fellowship grant is tax-free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.”

If not, you’ll have to include your scholarship money on your taxes as income.

Scholarship funds that exceed qualified education expenses: taxable

Room and board can be a pricey part of the college experience, so it might come as a surprise that scholarship or grant funds used for that purpose could be taxable. The same goes for any funds that exceed the cost of your tuition.

Scholarships and grants can have parts that aren’t taxable and parts that are. That’s why you need to know about “qualified education expenses.”

Qualified education expenses include the following:

  • Tuition
  • Fees
  • Course-related required expenses, such as books and supplies

Expenses that aren’t qualified seem to be whatever happens outside the classroom, including room and board and travel. Scholarship funds used for those expenses would be taxable.

Scholarships covering payment for your services: taxable

There are times when a scholarship or grant comes with a stipulation requiring you to work for it — by teaching or conducting research, for example.

In those cases, you’ll most likely have to treat payment for those services as taxable income.

But there are exceptions to this rule.

If your services are being paid for by the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, then you’re not required to treat that payment as taxable income. The same goes for services paid for in work-learning-service programs, as defined in Section 448(e) of the Higher Education Act of 1965.

Veterans benefits: not taxable

If you’re a veteran, the IRS doesn’t consider funds you get for education or training to be taxable income. That said, the IRS does caution you to be aware of the tax implications of any other grants or scholarships you receive.

You can find out more about education benefits for military members, including student loan forgiveness and repayment programs, via the U.S. Department of Veterans Affairs.

Other scholarships and grants: it depends

What about the other ways you might receive funds for your education? Consider the following:

  • Athletic scholarships
  • Fulbright scholarships
  • Need-based education grants

According to the IRS, all of the above “are tax-free to the extent used for qualified education expenses during the period for which a grant is awarded.”

Are your college scholarships taxable? Here’s what to do

If any or all of your scholarships are taxable, the first thing to do is find out how much of the amount is taxable. You can do so with the help of this worksheet from the IRS.

You can find instructions on how to report the taxable amount on your taxes here. The process differs depending on which tax form you use.

Even if your college scholarships are taxable, avoiding debt is key

If you just found out that your college scholarship could be taxable, you might be feeling a bit frustrated right now. After all, that money is supposed to help you with school, not cost you more money.

There’s good news, however. If you do your taxes properly, it might not cost you much. Here’s an example scenario:

  • You find out that $15,000 of your annual college scholarship is taxable.
  • You work part time and earn $3,000 per year.
  • Add your taxable scholarship money to your annual income, and you have $18,000 of income to report.
  • If you file as a single person in your tax bracket (not that of your parents), this number puts you at a 10 percent tax rate.
  • You’ll owe $1,800 in taxes this year.

Keep in mind that although you can pay these taxes in your own bracket, your parents still can claim you as a dependent (as long as you don’t claim any tax exemptions).

Although $1,800 might sound like a lot, even if you owe that much every year and graduate in four years, then you have to pay only $7,200 in taxes on your scholarship money. Compare that to the average student loan debt, which was $37,172 for the class of 2016.

What’s more, you can sign up for a payment plan on your taxes if you need to — and the interest rates on an IRS payment plan likely won’t be nearly as high as student loan interest rates can be.

In the end, if you take on as little student loan debt as possible, you’ll get a much fresher start after college.

The article Do You Owe Taxes on Your College Scholarship? originally appeared on studentloanhero.

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