Scholarship grants change the lives of their grantees by providing access to education, resources, and powerful networks. Some scholarship funds also leverage their programs to impact society in a broader way, aiming to change whole institutions, industries, and specific communities through these awards.
The resources you need to set up a scholarship fund depend on your goals for the scholarship fund and your method of operating it.
Will donations to the fund be tax deductible?
- A scholarship fund to benefit yourself or someone you know (a relative, a specific group of people designated by you) is not tax deductible.
- A fund that awards scholarships on an "objective and nondiscriminatory basis" is tax deductible for its donors.
Who can receive scholarship funding?
The IRS has guidelines on who can and cannot receive scholarships, as summarized by this FinAid article (find the "Laws and Regulations" section). Some key points for tax-deductible funds:
- Don't set up a fund for a specific person.
- Make sure the group that qualifies for your scholarship is general enough for the IRS to consider it a charitable class. Don't try to be sly by narrowing your criteria so that only the person or people you want can win.
- Don't give scholarships to insiders, like members of the selection committee, or to their family members.
How can I ensure that our scholarships make an impact?
Scholarships for Change is a website and set of tools designed to help donors increase the impact of scholarship giving. Developed by Candid, and funded by the Ford and Mellon Foundations, Scholarships for Change provides funding trend data, a map of related grants data, donor case studies, and a curated knowledge center that together serve to orient donors with a roadmap to effective scholarship philanthropy.
Below are other resources for setting up a scholarship fund:
- Your local community foundation or other scholarship fund managers—Scholarship funds often are set up and administered by a third party, such as a community foundation. Your local community foundation may have services to help you set up a scholarship fund. FinAid also lists organizations that provide scholarship management services (find the "Scholarship Management Organizations" section).
- A bank or credit union—You can set up an account to accept scholarship donations. However, be aware that large donations may be subject to a gift tax.
- 529 plan or trust—These two additional ways to set-up a scholarship fund have disadvantages to consider. The effort and expense of establishing a trust can significantly outweigh the benefit. And according to twocents.lifehacker.com, you might think about contributing to a parent's or student's 529 plan instead of setting up your own fund: "Distributions from an account not owned by the parent or student are considered untaxed income for the student, and therefore could seriously reduce the amount of aid they receive, giving your friends a major headache down the road."
- Crowdfunding—If you want to raise scholarship funds, crowdfunding is a viable option. Crowdfunding is a way to raise funds for a specific cause or project by asking a large number of people to donate money, usually in small amounts, and usually during a relatively short period of time, such as a few months.
Check out these Candid resources:
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