26 U.S.C. § 117 — Qualified scholarships

(a) General rule — A student's gross income does not include a "qualified scholarship" they get, if they're working toward a degree at an eligible educational organization (the kind described in section 170(b)(1)(A)(ii)). (b) Qualified scholarship — (1) In general — A "qualified scholarship" is a scholarship or fellowship grant amount that the student proves was actually spent on "qualified tuition and related expenses," as the grant's terms required. (2) Qualified tuition and related expenses — This means: (A) tuition and fees required to enroll or attend an eligible educational organization; and (B) fees, books, supplies, and equipment required for the student's courses there. (c) Limitation — (1) In general — Except as paragraph (2) says, subsections (a) and (d) don't cover the part of a scholarship or tuition reduction that's really payment for teaching, research, or other work the student must do to get it. (2) Exceptions — Paragraph (1) doesn't apply to money received under: (A) the National Health Service Corps Scholarship Program; (B) the Armed Forces Health Professions Scholarship and Financial Assistance program; or (C) a "comprehensive student work-learning-service program" run by a work college, as those terms are defined in the Higher Education Act of 1965. (d) Qualified tuition reduction — (1) In general — Gross income doesn't include a "qualified tuition reduction." (2) Qualified tuition reduction — This means a discount on tuition, for schooling below the graduate level, that an eligible educational organization gives to: (A) its own employee; or (B) someone treated as that employee's dependent under section 132(h). (3) Reduction must not discriminate in favor of highly compensated, etc. — For a highly compensated employee, paragraph (1) only applies if the tuition reduction is offered on basically the same terms to a broad group of employees, defined by a reasonable classification that doesn't favor highly compensated employees (as section 414(q) defines that term). Paragraph (4) was repealed by a 1989 law and no longer applies. (5) Special rules for teaching and research assistants — For a graduate student who teaches or does research for the school, the "below the graduate level" limit in paragraph (2) doesn't apply — meaning their tuition reduction can cover graduate-level education too.