Scholarship and grant money that exceeds QEE is taxable income. You agree with that, calling it “fair.” Here’s what you’re missing: in determining filing requirements and standard deductions, having earned income is better than having unearned income, and for these purposes taxable scholarships and grants are classified as earned income. This is much better for the taxpayer than having taxable scholarships and grants classified as unearned income. So in this case, the rule suits the taxpayer.