Case Study 2: Nonqualifying Expenses

This tax year, Jackie paid $3,000 for tuition and $5,000 for room and board at her local university. To pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The scholarship is a qualified scholarship that is excludable from Jackie's income—in other words, it is tax-free.

For purposes of the education credit, she must first subtract the tax-free scholarship from her tuition (her only qualified expense). The student loan is not considered tax-free educational assistance, so it does not reduce the qualified expenses. Jackie is treated as having paid only $1,000 in qualified expenses ($3,000 tuition - $2,000 scholarship).

Higher education emergency financial aid grants are not taxable to the student and do not reduce the student's qualified educational expenses.