I am a US citizen. I am currently receiving a scholarship from Saudi Arabia to attend a university in Saudi Arabia. Some of the scholarship funds are not spent on qualified expenses. Do these funds receive any special exemption since they come from overseas? Does it matter that I am overseas?

Same treatment as scholarships in the U.S. If you are a degree candidate and if the financial aid (includes scholarship and fellowship) is for tuition fee, other fees, books, supplies and equipment, then it is not taxable. Read scholarship and fellowship grants, Your U.S. Tax Return: The U.S. Income Tax Topics 1 (http://taxipay.blogspot.com/2008/08/us-income-tax-topics-1.html)