Setting Up a Scholarship Program
Section 501(c)(3) public charities are allowed to establish scholarship programs to grant funds to individuals, subject to the following rules:
- The scholarship program must further charitable and educational purposes within the meaning of Section 501(c)(3), as stated in the charity’s organizing document. For example, providing school tuition scholarships to individuals based on financial need and merit furthers charitable and educational purposes.
- Scholarships must be offered to a large enough group to constitute a charitable class. Scholarships cannot be limited to designated individuals or members of a narrowly defined group. A sufficiently broad and open-ended charitable class would include, for example, low income students or female students.
- Selection of scholarship recipients must be made in a nondiscriminatory fashion in terms of racial preference, and in an objective manner based on need and/or merit. No grants may be awarded to an officer or director of the charity, nor to a member of the scholarship selection committee, nor to a substantial contributor to the charity. Family members of these individuals are also not eligible to receive scholarships.
- The charity must keep adequate records and case histories to demonstrate that grants to individuals further charitable and educational purposes and that grant funds are not misused.
- The charity is not required to obtain advance approval from the IRS in order to make scholarship grants to individuals, however it must comply with the above rules. If the charity is applying for 501(c)(3) status and plans to conduct a scholarship program, it should describe its scholarship grant procedures on Schedule H of Form 1023. Note that private foundations are required to seek approval from the IRS prior to distributing scholarship grants.