Setting up a scholarship fund can be easy to do, but the specifics can vary depending on the type of fund you wish to establish. The easiest method is to set up a regular account for donations to a specified person or group. However, this type of scholarship does not carry any tax exemptions. If you wish to set up a tax-exempt scholarship fund, you need to qualify as a charitable organization that can accept tax-deductible donations.
The Ins and Outs of Setting Up a Scholarship Fund
There are various types of scholarship funds so the first step is determining the type of scholarship fund you want to establish. If you simply want to raise money so a friend or relative can afford to go to college, the process may be as simple as opening a bank account in that person’s name. If you want to create an ongoing charitable scholarship fund, you will face additional requirements.
Understand the Tax Rules
A good place to start is consulting IRS Section 4946. This is the section of the Internal Revenue Code that specifies which types of individuals are excluded from the charitable class when it comes to determining the tax-deductibility of scholarship contributions. Section 4946 in particular excludes family members from receiving tax-deductible scholarship grants and specifies that the class of scholarship recipients be broad and indefinite, such as “lower-income students.”
Open a Bank Account
For an individual scholarship fund, talk with your local bank or credit union about the specific requirements to accept scholarship deposits on behalf of another individual. For a charitable scholarship fund, you may want to consult with a tax expert to ensure that your fund meets all applicable IRS requirements when you open your bank account. Once you've opened the account, it's time to fund the scholarship. Whether through your own contributions or those of donors, you cannot distribute a scholarship until you have money in the account.
Develop a Selection Process
In the case of a charitable scholarship fund, the most difficult task may be developing and implementing a selection process. Typically, you must create an application form for potential recipients that may include elements such as a questionnaire and an essay. Tailor the application requirements based on the intended goal of the scholarship program.
Things to Consider
If your scholarship fund grows large, you may consider outsourcing the day-to-day operation of the scholarship program to an established third-party vendor. While establishing a scholarship endowment is easy, managing it is not. Scholarship management organizations can help you contain costs, reduce administrative headaches and increase compliance with federal and state scholarship laws.
- GrantSpace.org: Knowledge Base: What Resources Are Available for Setting up A Scholarship Fund?
- FinAid.org: Scholarship Design & Management
- Internal Revenue Service. "What Is an Eligible Educational Institution?" Accessed Oct. 17, 2019.
- National Scholarship Providers Association. "Guide to the Tax Treatment of Scholarships," Page 1. Accessed Oct. 17, 2019.
- Internal Revenue Service. "Topic No. 421 Scholarships, Fellow Grants, and Other Grants." Accessed Oct. 17, 2019.
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