This is a challenging one. My wife received a one-time significantly large scholarship at the very end of her medical school career. About 60% of the scholarship was used to clear out her current bursar account which included tuition from the second half of 2009 and the first half of 2010 as well as stipend for living expenses for both semesters. Some of that was also already in the form of student loans that were cancelled by the school when the loan was applied to the account. The other 40% of the scholarship the school paid direct to Nelnet to pay off other student loans from earlier years. How do I determine how much of the scholarship is taxable income. Conservatively I can take the total scholarship less her tuition for 2010 and pay a large tax bill in April but in reality the scholarship did pay tuition for 2009 and earlier via the payoff/cancellation of student loans.