Scholarships vs Grants: The Differences, Pell Grant Rules and Taxes

Scholarships and grants are both “gift aid”: money for education that you do not have to repay. The difference is mainly who decides you deserve it. Grants are usually awarded on financial need, often by governments, while scholarships are usually awarded for merit, talent or a particular background, often by colleges and private organisations. In practice the line is blurry, and the best financial aid packages combine both. This guide explains how each works in 2026-27, including the new Pell Grant rules, how they affect each other and when they can be taxed.

What Is a Grant?

A grant is aid based mainly on financial need. In the US, the largest source is the federal government, which uses the information you provide on the Free Application for Federal Student Aid (FAFSA) to calculate a Student Aid Index (SAI). The lower your SAI, the more need-based aid you can receive. The main federal grants are:

• Federal Pell Grant: for undergraduates with financial need. For the 2026-27 award year (1 July 2026 to 30 June 2027), the maximum award is $7,395.
• Federal Supplemental Educational Opportunity Grant (FSEOG): $100 to $4,000 a year for students with exceptional need, awarded by participating colleges while funds last.
• TEACH Grant: up to $4,000 a year for students who agree to teach a high-need subject in a low-income school for four years; if you do not complete the service, it turns into a loan with interest.
• Workforce Pell: new from July 2026, extending Pell to short job-training programmes of 150 to 599 clock hours lasting 8 to 15 weeks, with the award prorated by length.

States offer grants as well, such as California’s Cal Grant and New York’s Tuition Assistance Program, and many colleges give their own need-based grants, sometimes called institutional aid.

What Is a Scholarship?

A scholarship is usually awarded for something you have achieved or a quality you have, such as:

• Academic results or test scores
• Athletic, artistic or musical talent
• A field of study, such as nursing, engineering or teaching
• Community service or leadership
• Membership of a group, such as children of veterans, first-generation students or a particular heritage
• Where you live, or where you plan to study

Scholarships come from colleges, companies, charities, professional associations, religious organisations and community groups. Some are worth a few hundred dollars and others cover full tuition and living costs. Some, despite the name, also consider financial need. Our guide on how to find and win scholarships covers where to look and how to write winning applications.

What Are the Key Differences Between Scholarships and Grants?

• Basis: grants mostly reward financial need; scholarships mostly reward merit or specific criteria.
• Source: grants mainly come from federal and state governments and colleges; scholarships come from colleges and a huge range of private organisations.
• How you apply: for most grants, the FAFSA is the application; scholarships usually need separate applications, often with essays, references or portfolios.
• Conditions: many scholarships require a minimum grade point average or full-time enrolment to renew; Pell Grants depend on continued eligibility and satisfactory academic progress.
• Competition: federal grants are an entitlement if you qualify; private scholarships are competitive.

The one thing they have in common is that you normally keep the money. The main exceptions are when you withdraw from your course early, which can mean returning some federal aid, or when you break a condition, such as a TEACH Grant service obligation.

Can Scholarships Reduce Your Pell Grant?

Yes, and the rules tightened in 2026. Under the One Big Beautiful Bill Act, from the 2026-27 award year:

• Students whose SAI is $14,790 or more, twice the maximum Pell Grant, are not eligible for Pell, with limited exceptions.
• Students whose non-federal grants and scholarships cover their full cost of attendance are not eligible for a Pell Grant. That includes aid from colleges, states and private donors.

More generally, colleges must ensure that your total aid does not exceed your cost of attendance. If you win an outside scholarship after receiving your aid package, you must tell your financial aid office. Colleges usually reduce loans or work-study first, but some reduce their own grants. Ask how your college treats outside scholarships before you accept an offer.

Are Scholarships and Grants Taxable?

Sometimes. According to the IRS, a scholarship or grant is tax-free if you are a candidate for a degree at an eligible educational institution and the money is used for qualified education expenses: tuition and fees, and books, supplies and equipment required for your courses.

Money used for room and board, travel or optional equipment is taxable income, as is any payment for teaching, research or other services. Keep receipts and your college’s Form 1098-T, and see IRS Publication 970 for the details. Pell Grants follow the same rules.

How Do You Get Both?

The most effective strategy is to apply for everything that you are eligible for:

• File the FAFSA as early as possible. The 2027-28 form opens by 1 October each year, and some state and college aid is first come, first served. Our FAFSA guide walks through it step by step.
• Complete the CSS Profile if your college requires it for its own grants.
• Check your state’s aid programme and deadlines.
• Search for scholarships year-round, using free databases and local sources such as employers, community foundations and high school counsellors.
• Never pay to apply. Legitimate scholarships do not charge application fees, and the FTC warns that “guaranteed” scholarship services are a common scam.
• Reapply every year, because many awards renew only if you do.

What If Scholarships and Grants Aren’t Enough?

Most students fill the gap with work-study, savings or loans. If you need to borrow, federal loans have protections that private loans lack, as explained in our guide to federal vs private student loans, and our overview of the new student loan repayment plans shows what repayment will look like. If you are thinking of studying overseas, our guide to study abroad scholarships for Americans lists funding that can travel with you.

How Do Grants and Scholarships Work in the UK and Canada?

The terms are used differently elsewhere. In England, maintenance grants for most new students were replaced by loans in 2016, so need-based help now mostly comes as bursaries from universities, which work like grants, alongside merit scholarships. In Canada, the federal Canada Student Grants are awarded automatically when you apply for student aid through your province or territory, and universities offer entrance scholarships based on grades. In every country the principle is the same: apply for state aid early and search widely for institutional and private awards.

Scholarships vs Grants: Quick Summary

• Both are gift aid that does not need repaying.
• Grants are mainly need-based and come largely from government; the FAFSA is the key application.
• Scholarships are mainly merit- or criteria-based and come from colleges and private groups, with separate applications.
• Maximum Pell Grant for 2026-27: $7,395.
• Tax: tax-free when spent on tuition, fees and required books and supplies; taxable when spent on room and board.

Featured image: 2012 – studying in Howard-Tilton Library New Orleans, by Tulane Public Relations / Wikimedia Commons, CC BY 2.0. Cropped, colour-graded and combined with MediaPavilion branding.

Sources

• Federal Student Aid — 2026-27 Federal Pell Grant maximum and minimum award amounts (30 January 2026).
• Federal Student Aid — 2026-27 FAFSA form and Pell Grant eligibility updates (15 August 2025).
• Federal Student Aid — 2026-2027 FSA Handbook: Packaging aid (2026).
• Congressional Research Service — Workforce Pell Grants (2026).
• Federal Student Aid — Grants (accessed 1 November 2026).
• Federal Student Aid — Scholarships (accessed 1 November 2026).
• Internal Revenue Service — Publication 970, Tax Benefits for Education (2025).
• Federal Trade Commission — Avoiding scholarship and financial aid scams (accessed 1 November 2026).