If your child is deciding between two schools based on a financial aid package, be sure to weigh the taxes that may accompany the offer.
Families depend on scholarships, assistantships and grants to help them afford higher education.
Indeed, the annual cost of tuition, fees, room and board at a public four-year college hit $19,080 for the 2018-2019 school year, according to the College Board. And it was $46,680 for private schools.
The upside of scholarships and other "free money" opportunities is that you don't have to pay them back, unlike loans. However, there is a catch: Scholarships and assistantships may be subject to income tax.
In general, scholarships that cover tuition and fees are tax-free, while money that pays for room and board is not.
Telling the difference between the two is harder than it seems.
"The problem you run into is when the school says, 'We're giving you $10,000 and calling it a scholarship,'" said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co. in Milwaukee. "Just because the school says it's tax-free, doesn't mean it is."
Tax-free conditions 
Two conditions must apply in order for a scholarship or fellowship to be tax-free, according to the IRS.
1. You're a degree-candidate at an educational institution that maintains a regular faculty and curriculum. The school must have a regularly enrolled body of students in attendance.
2. The money you receive is used to pay for tuition and fees necessary for enrollment or for books, fees, supplies and equipment needed for courses.
Scholarships that cover incidental expenses, including room, board and travel are taxable.
You are also on the hook for taxes on any money you get as payment for teaching, research and other services as a condition of receiving the cash.
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You might also owe taxes on the portion of a scholarship that exceeds the total tuition, fees, books, supplies and equipment — even if the funds are earmarked for those costs, said Mark Kantrowitz, student loan expert and VP of research at Savingforcollege.com.
Students who get money for services required by the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program don't need to pay taxes on the amounts received.
Tuition waivers and stipends Saving for college 
Fellowships and research assistantships are a little more complicated. These programs may combine a tax-free tuition waiver and a taxable living stipend.
The stated purpose of the funds and how you use the money will matter.
"Let's say that you get a partial tuition waiver and a living stipend, and you use the stipend to pay the tuition," said Kantrowitz.
"It will still be treated as taxable because it was designated for living expenses, as opposed to tuition," he said.
Reporting to the IRS
