Are scholarships and grants taxable income for the student?

It depends on how the money is used, per IRS rules. Scholarship or grant money spent on qualified education expenses, tuition, required fees, and required books and supplies, is tax-free for a degree-seeking student. But amounts used for room and board, travel, or optional equipment are taxable and must be reported as income on the student's return. That's why a large scholarship covering living costs can create a surprise tax bill. Athletic scholarships and Pell Grants follow the same use-based test. If a scholarship requires the student to provide services, like teaching or research, that portion is generally taxable as wages. Keep records of how each award was applied so you can correctly split the tax-free and taxable portions.