Scholarships and fellowships used to pay for tuition, course related fees and expenses (qualified educational expenses) are not taxable to the recipient. Scholarships and fellowship payments used for any other purpose are taxable. Your tax professional should be able to answer your questions regarding your specific case.
On March 6, 2007 in 527 Old Chem a Q&A session was held to answer student questions. For your convenience the audio (1 hour 47 minutes) and handouts (FAQs and definitions) from this session are posted here:
Lessen your tax burden....find out more information about claiming educational tax credits by reviewing the IRS Tax Benefits Information Center.