If you’re thinking about applying for scholarships, you probably know that you must report every scholarship you win, which will result in scholarship displacement.

Scholarship displacement is the practice of reducing your financial aid package by your scholarship amount so that your net gain becomes zero.

Related: What Is Scholarship Displacement And Why You Should Care?

Related: When You Should Not Apply For Scholarships

You’re probably thinking, “Why would I voluntarily shoot myself in the leg?” and that would be a valid question to ask given how much time and work you had to sacrifice to win your scholarships.

This article is intended to help students and parents like you understand whether reporting scholarships is required and what would happen if you choose not to do so.

Do I really have to report my scholarships?

Yes, but not for the reasons you think.

According to financial aid expert and Forbes contributor, Mark Kantrowitz, you are NOT required by federal law to report your scholarships to your school, which may come as a surprise for many students and parents.

However, you are required to report scholarships to the IRS if they are used to cover room and board, travel, teaching, research, and other fees not directly associated with enrollment.

You can learn more about this and how to report taxable scholarships here.

If you fail to report the taxable portion of your scholarships, you may be liable to charges related to tax fraud.

“Intentionally failing to file an IRS Form 1098-T and to pay tax on the taxable portion of a scholarship is tax fraud. It is also stupid, because the IRS already has the information on the IRS Form 1098-T,” says Mark Kantrowitz.

I want to make an important distinction here: 

We’ve only been talking about federal law, not school policy, so it is possible to also be punished by your school (not the government) for failing to report all of your scholarships (taxable or not).

Key takeaway: Report all of your scholarships to your school and the taxable portion to the IRS.

Will my college find out that I didn’t report my scholarships?

In most cases, yes, your college will find out eventually because it has access to many different sources of information so you might as well report your scholarships anyway.

Overview:

• Scholarship providers
• FAFSA (tax form)
• Transcript notation

One way your school can find out is through your scholarship provider since many will send your award payments to your school so it could disburse it to you instead.

Another way is through your FAFSA (assuming you reported taxable scholarships on your tax forms) since this information is available to colleges you applied to so you can be considered for institutional aid.

Finally, some scholarships also award students with a transcript notation through the registrar’s office. This information is also accessible to the financial aid office.

These are just some of the ways your college can find out when you win a scholarship so you should report it regardless to stay on the safe side.

What happens if my college finds out I didn’t report my scholarships?

If your financial aid would have been reduced had you reported your scholarship(s), then your college will likely bill you for that amount.

And you definitely don’t want to get on your college’s bad side because it has a lot of ways to turn your life into a nightmare, such as withholding your degree, preventing you from registering for classes, or exploring legal options against you.

It’s for these reasons why you should report all of your scholarships regardless of whether you think your college would find out or not.

Key takeaway: If you don’t report your scholarships to your college and it would have resulted in a lower financial aid package, you could be forced to repay that amount (best-case) or charged with tax fraud (worst-case).

Ethical Dilemma

In the previous section, I mentioned scenarios in which your college would be able to find out when you do win scholarships.

However, there is one scenario I can think of where your college wouldn’t be able to find out.

Assuming (1) your scholarship is not taxable (meaning you don’t have to report it to the IRS) and (2) the scholarship provider disburses award payments to you directly, then technically there is really no way your college would know if you won a scholarship or not.

Of course, this presents an ethical dilemma because many colleges use scholarship displacement to redistribute funds to other students who may need it most.

While this is true, there has been growing support in the U.S to ban scholarship displacement because it takes away aid that is rightfully yours and punishes students who take the initiative to win scholarships.

Maryland recently passed a law to ban scholarship displacement in public colleges for these exact reasons.

So should you be honest and take the “L” or take advantage of this opportunity by staying silent? This is a decision you will have to make on your own.

TL;DR

All you need to know is you should report your scholarships to your school to avoid punishment for violating its policy. 

Also, you must report scholarships to the IRS if they are taxable because not doing so is considered tax fraud.

Related: Any Time Is A Great Time To Apply For Scholarships!