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How to Start a Scholarship Fund

Mar 29, 2024

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Whether you’re interested in starting a scholarship in the name of a loved one, supporting students in their path through higher education, or starting a scholarship fund as part of your company’s corporate giving strategy, opening a scholarship fund can be a powerful way to make a difference in the lives of individuals seeking to advance their education and opportunities for the future.

Wondering how to start a scholarship fund? In this article, we’ll walk you through all of the basics of scholarships, which includes the IRS guidelines for how to start a scholarship fund in Texas, as well as some important strategic considerations to make, depending on the purpose of the scholarship fund that you want to establish.

Key Insights

  • Establishing a scholarship fund can be complex, but the right philanthropic partner can help simplify the process.
  • The IRS has strict guidelines for what qualifies scholarships as tax-exempt to ensure that scholarship funds benefit the community/recipients.
  • Consider other legal requirements (e.g., transparency, conflicts of interest, non-discrimination, thorough record keeping, etc.) and consult qualified legal and tax professionals before setting up your scholarship fund.
  • Greater Houston Community Foundation is an important philanthropic partner that can offer full-service management of scholarship programs to help donors open the door to academic success for Houston students. 

Table of Contents

Is it hard to start a scholarship fund?

Although starting a scholarship fund requires dedication, planning, and adherence to a few specific guidelines, it’s easier than you might think. As you consider working  with a community foundation or another scholarship provider, you should have the following things in mind:

  1. Purpose. Clearly articulate the purpose and goals of your scholarship fund. Are you opening it in memory of your grandmother who was a mathematician? Are you hoping to help kids from the neighborhood you grew up in? Identify your target audience, whether it be students pursuing a particular field or those with financial needs.
  2. Eligibility criteria. Eligibility criteria are related to your purpose, but they are not one in the same. How do you want people to qualify for the scholarship? Eligibility criteria can be regional, academic, financial, or community-based. Whoever you partner with on your scholarship should help ensure that your eligibility criteria are fair and transparent. 
  3. Budget and funding. How much are you looking to contribute? Where exactly is the money coming from? Even if you’re not sure how many students you want to sponsor or for how long, you should have some figures on how the scholarship will be funded, and how it may impact your personal finances. 

Although there are many other considerations to go over before it is time to launch your scholarship, these three building blocks will get you a long way. You don’t have to have absolutely everything about your scholarship program figured out — that’s what a third-party scholarship administrator like Greater Houston Community Foundation is for — but you should have some strong ideas about your intentions and audience. In the early stages, knowing who you want to make a difference for is really all you need. 

What are the IRS rules for scholarship programs?

IRS guidelines for starting a scholarship fund will differ based on whether your scholarship is an individual grant or part of a scholarship program at your organization; businesses that help the community through scholarship funds are held to incredibly high standards by the IRS, and are only eligible for tax-exemption under certain circumstances, to ensure that the programs are being run for the benefit of the community and not the benefit of the company.

The IRS guidelines for starting a scholarship fund concern whether the fund will be tax-advantaged or treated as taxable expenditures. So, under what circumstances can scholarships be tax deductible?

Is starting a scholarship fund tax deductible?

The IRS stipulates that grants to individuals are taxable expenditures unless the following conditions are met: 

  1. The grant is awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the IRS; and
  2. The grant is either:
    1. a scholarship or fellowship that is used for study at an educational institution,
    2. a prize or award that is excludable from gross income under Internal Revenue Code section 74(b),
    3. or to achieve a specific objective, produce a report, or improve a literary, artistic, musical, scientific, teaching, or similar capacity, skill, or talent of the grantee.

Company scholarship programs are held to the same standards as grants to individuals and are taxable expenditures unless they meet the above requirements. Further, the IRS provides the following additional guidance for company scholarship programs: 

  1. The preferential treatment derived from employment must not have any significance beyond that of an initial qualifier for the scholarship, AND;
  2. The selection of scholarship grantees must be controlled and limited by substantial non-employment related factors, including a selection committee separate from the private foundation, its organizer, and the employer concerned, AND;
  3. There must exist only a limited probability that qualified employees or their children will receive scholarship grants.

All this to say: you may be eligible to open a scholarship fund in a potentially tax-advantaged manner, and contributions to scholarship funds can be tax-deductible, but it’s critical that you follow specific guidelines outlined by the IRS. Please make sure to consult with a qualified tax professional for additional guidance. 

Other legal requirements for scholarship funds

Establishing a scholarship fund comes with legal responsibilities that go beyond IRS compliance, encompassing ethics, and transparency. These include adopting non-discrimination policies, preventing conflicts of interest, ensuring transparency through regular updates, and maintaining meticulous recordkeeping. Compliance with state and federal laws is crucial, with scholarship management partners helping to navigate relevant regulations. Other considerations include data privacy, collaboration with educational institutions, and comprehensive planning for impactful community support. Please ensure to seek guidance from a qualified tax professional for further assistance. 

How to start a scholarship fund

Whether you’re wondering how to set up a scholarship fund to assist students or how to set up a scholarship fund for a nonprofit or corporation, starting a scholarship in Texas can happen in a few easy steps. 

  1. Solidify your purpose, eligibility, and budget. Remember that you don’t need millions to start a scholarship fund, but you should have a clear idea of where you want to make a difference in mind. 
  2. Decide who you will be partnering with for scholarship management. Although you can create your own organization to administer your scholarship fund, it is much more costly than engaging a trusted organization that can help manage and distribute your scholarship. 
  3. Establish a selection committee. Your selection committee, which is responsible for reviewing scholarship applications, should be diverse and impartial. They should clearly understand the honoree’s values and selection criteria and meet all applicable standards set by the IRS. 
  4. Promote your scholarship. Publicize the scholarship opportunity through local media, educational institutions, and community organizations. You can also leverage the network of your scholarship management partner to reach a broader audience.
  5. Distribute the funds. Whether you’re planning a meaningful award presentation ceremony to honor the scholarship recipients and showcase the impact of the fund or are quietly awarding the recipients their grants, working with an experienced scholarship manager can make distributing your scholarship funds much easier. 

Choosing an existing 501(c)(3) nonprofit organization to be your philanthropic partner when creating your scholarship fund can simplify the fund creation and administration processes. Additionally, it may potentially enhance your eligibility for charitable tax deductions. High-net-worth individuals looking to make a difference in their communities should have trusted partners in strategic philanthropy who can help them facilitate their charitable efforts for maximum impact, whether they are interested in donating to natural disaster relief organizations or setting up scholarships in Houston. 

Partner with Greater Houston Community Foundation to start your Houston scholarship fund today

Although we cannot teach you how to start a scholarship fund in one article online, we can make things easier by working with you to develop and execute your scholarship fund. Greater Houston Community Foundation offers full-service management of scholarship programs to help donors open the door to academic success for Houston students. We administer over 60 unique scholarship funds that grant more than $4.5 million annually to college students. Successfully establishing a scholarship requires both a vision for making a difference in your community and meticulous planning — you’ve already got the vision, let us help you with the rest. 

From strategic scholarship design to management and administration, Greater Houston Community Foundation is here to help simplify your journey to making an impact in the community. 

Greater Houston Community Foundation is here to partner with you on your giving, whether you’re interested in starting a donor advised fund or creating a youth philanthropy program.Reach out to a philanthropic advisor to talk about establishing a scholarship fund today or continue reading about how scholarships can change lives. 

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