! scholarship — Publication 970 — Tax Benefits for Education

CAUTION dian tribal government that is excluded from in-

come under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program de- scribed in Revenue Procedure 2014-35, section 5.02(2)(b) (ii), available at IRS.gov/irb/2014-26_IRB#RP-2014-35.

You may be able to increase the combined value

TIP of an education credit if the student includes

some or all of a scholarship or fellowship grant in income in the year it is received. For examples, see Coor- dination with Pell grants and other scholarships, later.

Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2025 may be treated as a refund. See Tax-free educational assistance , earlier.

Refunds received in 2025. For each student, figure the adjusted qualified education expenses for 2025 by adding all the qualified education expenses for 2025 and subtracting any refunds of those expenses received from the eligible educational institution during 2025.

Refunds received after 2025 but before your in- come tax return is filed. If anyone receives a refund after 2025 of qualified education expenses paid on behalf of a student in 2025 and the refund is paid before you file an income tax return for 2025, the amount of qualified education expenses for 2025 is reduced by the amount of the refund.

Refunds received after 2025 and after your income tax return is filed. If anyone receives a refund after 2025 of qualified education expenses paid on behalf of a student in 2025 and the refund is paid after you file an income tax return for 2025, you may need to repay some or all of the credit. See Credit recapture next.

Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2025, or any refund of your qualified education expenses paid in 2025, is received after you file your 2025 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2025 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2025 and figure the amount by which your 2025 tax liability would have increased if you claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.

Example. You paid $7,000 tuition and fees in August 2025, and your child began college in September 2025. You filed your 2025 tax return on February 17, 2026, and claimed an American opportunity credit of $2,500. After you filed your return, you received a refund of $4,000. You must refigure your 2025 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. The refigured credit is $2,250. The increase to your tax liability is $250. Include the difference of $250 as additional tax on your 2026 tax return. See the instructions for your 2026 income tax return to determine where to include this tax.

If you pay qualified education expenses in both

TIP 2025 and 2026 for an academic period that be-

gins in the first 3 months of 2026 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2026 instead of reducing your expenses for 2025.

Amounts that don’t reduce qualified education ex- penses. Don’t reduce qualified education expenses by amounts paid with funds the student receives as:

Payment for services, such as wages;
A loan;
A gift;

14 Chapter 2 American Opportunity Credit Publication 970 (2025)

An inheritance; or
A withdrawal from the student’s personal savings.

Don’t reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the student’s tax return in the following situations.

The use of the money is restricted, by the terms of the scholarship or fellowship grant, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education ex- penses in chapter 1.
The use of the money isn’t restricted.

Example 1. Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require payment of any fees in addition to the tuition in order to enroll in or attend classes. To help pay these costs, Joan was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Joan’s college expenses.

University X applies the $2,000 scholarship against Joan’s $8,000 total bill, and Joan pays the $6,000 balance of the bill from University X with a combination of the student loan and personal savings. Joan doesn’t report any portion of the scholarship as income on the tax return.

In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce the qualified education expenses by the amount of the scholarship ($2,000) because the entire scholarship was excluded from the reported income on Joan’s tax return. The student loan isn’t tax-free educational assistance, so the qualified expenses don’t need to be reduced by any part of the loan proceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition − $2,000 scholarship).

Example 2. The facts are the same as in Example 1, except that Joan reports the entire scholarship as income on the tax return. Because Joan reported the entire $2,000 scholarship as income, the qualified education expenses don’t need to be reduced. Joan is treated as having paid $3,000 in qualified education expenses.

Coordination with Pell grants and other scholarships. You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may increase only if the amount of the student’s qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student’s income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren’t qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student includes in income don’t reduce the student’s qualified education expenses available to figure your American

opportunity credit. Thus, including enough scholarship or fellowship grant in the student’s income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional American opportunity credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can’t exceed the amount of the student’s actual nonqualified expenses that are paid in the tax year. This amount may differ from the student’s living expenses estimated by the student’s school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn’t prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable income and may be required to file a tax return. But this allows payments made in cash, by check, by credit or debit card, or with borrowed funds such as a student loan to be applied to qualified education expenses.

Example 1—no scholarship. Bill, age 28 and unmarried, enrolled full-time in 2025 as a first-year student at a local college to earn a degree in law enforcement. This was Bill’s first year of postsecondary education. During 2025, Bill paid $5,600 for qualified education expenses and $4,400 for room and board for the fall 2025 semester. Bill and the college meet all the requirements for the American opportunity credit. Bill’s adjusted gross income (AGI) and MAGI, for purposes of figuring the credit, are $39,250. Bill claims the standard deduction of $15,750, resulting in taxable income of $23,500 and an income tax liability before credits of $2,585. Bill claims no credits other than the American opportunity credit. Bill figures the American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and a tax liability after credits of $85 ($2,585 − $2,500).

Example 2—scholarship excluded from income. The facts are the same as in Example 1, except that Bill was awarded a $5,600 scholarship. Under the terms of the scholarship, it may be used to pay any educational expenses, including room and board. If Bill excludes the

Publication 970 (2025) Chapter 2 American Opportunity Credit 15

scholarship from income, it will be deemed (for purposes of figuring the education credit) to have been applied to pay tuition, required fees, and course materials. Bill’s adjusted qualified education expenses would be zero, and there would be no education credit. Therefore, Bill’s tax liability after credits would be $2,585.

Example 3—scholarship partially included in in- come. The facts are the same as in Example 2 . If, unlike Example 2, Bill includes $4,000 of the scholarship in income, the $4,000 will be deemed to have been applied to pay for room and board. The remaining $1,600 of the $5,600 scholarship would reduce the qualified education expenses, and the adjusted qualified education expenses would be $4,000. Bill’s AGI and MAGI would increase to $43,250, the taxable income would increase to $27,500, and the tax liability before credits would increase to $3,065. Based on the adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity credit of $2,500, and the tax liability after credits would be $565 ($3,065 − $2,500).

Example 4—scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3, except the $5,600 scholarship is paid directly to the local college. The fact that the local college applies the scholarship to Bill’s tuition and related fees doesn’t prevent Bill from including $4,000 of the scholarship in income. As in Example 3, by doing so, Bill will be deemed to have applied $4,000 to pay for room and board. Bill would be able to claim the American opportunity credit of $2,500, and the tax liability after credits would be $565.

Example 5—student with a dependent child. Jane, age 28 and unmarried, enrolled full-time as a first-year student at a local technical college to get a certificate as a computer technician. This was Jane’s first year of postsecondary education. During 2025, Jane paid $6,000 for qualified education expenses. Jane and the college meet all the requirements for the American opportunity credit. Jane has a dependent child, age 10, who is a qualifying child for purposes of receiving the earned income credit (EIC) and the child tax credit. Jane’s wages are $24,125. Jane withheld no income taxes on these wages and has no other income or adjustments. Jane was awarded a $5,500 scholarship. Under the terms of the scholarship, it may be used to pay tuition and any living expense, including rent. Jane paid $10,000 in living expenses in 2025.

If Jane excludes the entire scholarship from income, Jane will be deemed to have applied the entire scholar - ship to pay qualified education expenses. The AGI and MAGI would be $24,125. The tax liability before any credits would be $51. The qualified education expenses would be reduced to $500. Jane would be able to receive a $251 American opportunity credit ($200 refundable and $51 nonrefundable), a $1,700 additional child tax credit, and a $4,204 EIC. In total, Jane would be able to receive a tax refund of $6,104.

If Jane includes the entire scholarship in income, Jane will be deemed to have applied the entire scholar s hip to pay living expenses. The qualified education expenses would be $6,000, and the AGI and MAGI would be

$29,625. The tax liability before any credits would be $603. Jane would be able to receive a $1,603 American opportunity credit ($1,000 refundable and $603 nonrefundable), a $1,700 additional child tax credit, and a $3,325 EIC. In total, Jane would be able to receive a tax refund of $6,025.

If Jane includes $3,500 of the scholarship in income, Jane will be deemed to have applied $3,500 of the schol - arship to pay living expenses, and $2,000 to pay qualified education expenses. The qualified education expenses would be $4,000, and the AGI and MAGI would be $27,625. The tax liability before any credits would be $403. Jane would be able to receive a $1,403 American opportunity credit ($1,000 refundable and $403 nonrefundable), a $1,700 additional child tax credit, and a $3,645 EIC. In total, Jane would be able to receive a tax refund of $6,345.

If Jane includes $1,500 of the scholarship in income, Jane will be deemed to have applied $1,500 of the schol - arship to pay living expenses, and $4,000 to pay qualified education expenses. The qualified education expenses would be $2,000, and the AGI and MAGI would be $25,625. The tax liability before any credits would be $201. Jane would be able to receive a $1,001 American opportunity credit ($800 refundable and $201 nonrefundable), a $1,700 additional child tax credit, and a $3,964 EIC. In total, Jane would be able to receive a tax refund of $6,464. This is the highest tax refund among these scenarios.

Note: Whether you will benefit from applying a scholarship or fellowship grant to nonqualified expenses will depend on the amount of the student’s qualified education expenses, the amount of the scholarship or fellowship grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student’s federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the total amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student’s tax refunds or taxes owed. For example, if you are the student and you also claim the EIC, choosing to apply a scholarship or fellowship grant to nonqualified expenses by including the amount in your income may benefit you if the increase to your American opportunity credit is more than the decrease to your EIC.

Expenses That Don’t Qualify

Qualified education expenses don’t include amounts paid for:

Insurance;
Medical expenses (including student health fees);
Room and board;
Transportation; or
Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

16 Chapter 2 American Opportunity Credit Publication 970 (2025)

Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don’t include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student’s degree program, these expenses can qualify.

Comprehensive or bundled fees. Some eligible educational institutions combine all of their fees for an academic period into one amount. If you don’t receive or don’t have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T. See Figuring the Credit, later, for more information about Form 1098-T.