Legal Guidelines Regarding Scholarships
As a university that participates in federal financial aid programs, we are bound by certain policies and regulations. The Financial Aid and Scholarship Office views its role of monitoring compliances very seriously, to protect the university from risk and liability. Before submitting a scholarship to our office, please review the guidelines listed below.
Most awards fall into one of the following university -sanctioned categories:
These categories assist the university in monitoring and reporting compliances with taxation and withholding requirements.
Scholarship: An amount paid, either as a stipend or tuition reduction, for the benefit of a student at an educational institution to aid in the pursuit of studies. The recipient may be either an undergraduate or graduate student.
Fellowship: An amount paid for the benefit of an individual to aid in the pursuit of study or personal research. Awarded to graduate students.
Grants: Scholarships and fellowships awarded primarily on the basis of financial need.
A scholarship, fellowship, or grant must be a "relatively disinterested, 'no-strings' educational [grant], with no requirement of any substantial quid pro quo from the recipients" (United States Supreme Court, Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17). In other words, no teaching, research, or other services -- past, present, or future -- can be required of the recipient as a condition for receipt of the award, even if the service is required of all candidates for a degree. This requirement is a significant change from pre-1986 tax law. A stipend or tuition reduction with a research or service component or other "strings" attached is subject to withholding (see Internships and Assistantships below).
The term "qualified scholarship" means any amount received by a student that can be and is used for:
- Required tuition and fees
- Books, supplies, and equipment required for classes
- Required insurance fees
Scholarship stipends are considered taxable income if they are used for:
- Supplies and equipment not required for courses
- Travel expenses
- Conference fees
- Board and room
- Other expenses not falling under those outlined for qualified scholarship expenses
Funds given with "strings attached are not only subject to taxation, but also are subject to withholding. For the purpose of this discussion, internships and assistantships are stipends or tuition reductions given for:
- Payment for teaching, research, or other services
- Services required as a condition for receipt of the stipend
- Services that primarily benefit the grantor (BYU)
These conditions, or attached strings, are often referred to as the IRC 117(c) limitation. To ensure compliance with taxation requirements, BYU also classifies qualified scholarships subject to the IRC 117(c) limitation as internships and assistantships. The IRS has ruled that even stipends given to student volunteers who participate in service programs fall under the IRC 117(c) limitation and must be declared as taxable income subject to withholding. In some instances, however, students may receive a scholarship in addition to an internship if the former is not attached to any "strings."
In the case of research, stipends may fall under the scholarship rules only if the research is conceived of entirely by the student and is solely for the student's educational benefit. A student may not receive a scholarship in exchange for participation or in lieu of compensation for research or work sponsored by the university or other parties.
Because of taxation implications, campus granting offices must work with Student Employment Services to process all internships and assistantships. SES will calculate appropriate withholdings, if any, prior to disbursing funds to the students.
Taxable prizes usually involve a payment as an award or recognition for a special achievement, skill, knowledge, or renown in a specific area. Prizes may also be awarded for those who excel in contests or competitions. When awarding a prize, the grantor is not required to specify that the recipients use the funds "for the purpose of aiding his study, training, or research." The prize may simply recognize an achievement or renown, and the funds may be used for any purposes at the recipient's discretion. In such instances, the entire sum is considered taxable income and subject to 1099-MISC reporting even if the recipient chooses to use the funds for educational purposes. These types of prizes should be processed on a 1099 Fast Track Check Requisition through Financial Services.
If a prize is awarded to a student with the stipulation that it be used for educational purposes only, then this may be considered a legitimate scholarship and submitted through the Financial Aid and Scholarship Office. To avoid complications, we recommend the grantor award the stipend for a future semester or term rather than reimbursement for qualified expenses during the current enrollment.
Prior to the contest or recognition, campus granting offices should specify and publish the terms and conditions of the prize, including whether the stipend must be used for educational purposes. Candidates' enrollment or graduation plans may not be used to determine whether the prize will be given as a scholarship for educational use only or as a cash prize which can be used for any purpose.