How to Start a College Scholarship Fund
Learn how to establish, manage, and sustain a college scholarship fund to empower students and leave a lasting educational legacy.
Learn how to establish, manage, and sustain a college scholarship fund to empower students and leave a lasting educational legacy.
Establishing a college scholarship fund supports students in their pursuit of higher education. These funds provide financial assistance, alleviating the burden of tuition and other educational expenses. Scholarships are distinct from loans because they do not require repayment, offering a direct financial benefit to recipients. Creating a scholarship fund offers personal satisfaction by contributing to educational access and the development of future generations.
Defining the purpose and vision for a scholarship fund is the first step. This involves articulating the specific mission, such as supporting students in a particular field, from a specific background, or with certain financial needs. For example, a scholarship might focus on students pursuing STEM degrees, those from underserved communities, or individuals demonstrating exceptional community involvement.
Clearly defined scholarship criteria ensure eligibility, objectivity, and non-discrimination. These criteria can include academic merit, financial need, community involvement, specific area of study, or geographic location. The criteria should be broad enough to create a charitable class, as required by the IRS.
Deciding on the scholarship amount and duration involves determining if it will be a one-time award, renewable, or an annual scholarship. Setting a financial plan includes determining the size of the scholarships and the total funding requested, which influences the fund’s impact and longevity.
Consider how the fund will be financially supported. This involves deciding if the scholarship will be sustained through a personal donation, ongoing fundraising efforts, or by establishing an endowment. An endowment fund provides scholarships from the interest generated by a principal amount, allowing the fund to last indefinitely.
Selecting the appropriate legal and administrative structure is a decision when establishing a scholarship fund. The primary options include forming an independent non-profit organization, utilizing a Donor-Advised Fund (DAF), or partnering with an existing educational institution or community foundation. Each structure has distinct implications for administrative burden, control, and tax benefits.
Establishing an independent non-profit organization, typically a 501(c)(3), involves a process of incorporation at the state level by filing articles of incorporation. An Employer Identification Number (EIN) must be obtained from the IRS, which is like a Social Security number for the organization and is required for tax purposes.
Once the EIN is secured, the organization applies for tax-exempt status under Internal Revenue Code Section 501(c)(3) by filing Form 1023 with the IRS. This form requires detailed information about the organization’s purpose, activities, and financial structure. Processing can take several months. A streamlined version, Form 1023-EZ, is available for smaller organizations with lower gross receipts and total assets. However, organizations maintaining donor-advised funds or certain types of entities are not eligible to use Form 1023-EZ.
A Donor-Advised Fund (DAF) offers a simpler, more flexible alternative. A DAF is a charitable giving account established at a public charity, known as a sponsoring organization. These sponsoring organizations can include community foundations, national organizations, or single-issue non-profits. Donors contribute assets to the DAF, receiving an immediate tax deduction, and then recommend grants from the fund to qualified charitable organizations over time.
DAFs provide immediate tax benefits, and the funds within the DAF can grow tax-free, potentially increasing the amount available for future grants. This structure significantly reduces the administrative burden, as the sponsoring organization handles the compliance and administrative tasks. While donors can be part of a selection committee for scholarships, they cannot hold the majority vote or directly choose recipients to ensure compliance with IRS regulations.
Another option is partnering with an existing organization, such as a college or university, high school, or community foundation. This approach leverages the institution’s established infrastructure, expertise, and existing tax-exempt status. Establishing a named scholarship fund directly with an educational institution typically involves an agreement outlining the scholarship criteria, amount, and duration. This can be a straightforward path for donors who prefer less administrative involvement and want to benefit from the established processes of a larger entity.
The choice of structure depends on factors such as the desired level of control, the administrative burden the donor is willing to undertake, tax implications, and the initial capital available. For instance, an independent non-profit provides maximum control but demands significant administrative and compliance responsibilities. A DAF offers simplicity and immediate tax advantages with less control, while partnering with an existing organization provides convenience and leverages established systems.
Once a scholarship fund is established, effective management of the application and selection process identifies deserving recipients. Promoting the scholarship to potential applicants is a first step. Strategies include working with educational institutions, utilizing online scholarship platforms, and engaging in community outreach. Social media, email campaigns, and targeted advertising can reach a wide audience. Enlisting past scholarship recipients as ambassadors can also be effective, as students often trust information shared by their peers.
The application process requires specific documents and information from candidates. This typically includes academic transcripts, personal essays, and letters of recommendation. Standardized application forms help streamline the collection of necessary details. Clearly communicate requirements and deadlines to applicants.
The review and selection process must maintain objectivity and adhere to the predefined criteria. Establishing a selection committee, if applicable, ensures multiple perspectives in evaluating applications. The committee reviews submitted materials and, in some cases, conducts interviews. Decisions must align strictly with the established eligibility and selection criteria to ensure fairness and transparency.
Following selection, award notification and fund disbursement procedures begin. Selected recipients are formally notified of their award. Scholarship funds are generally sent directly to the educational institution to cover eligible expenses such as tuition, fees, room and board, and textbooks. In some cases, funds may be disbursed directly to the student, who then assumes responsibility for using the money for educational purposes.
Maintaining the long-term viability of a scholarship fund requires ongoing attention to financial health and compliance. Securing continued financial support ensures the fund’s longevity. This can involve implementing various fundraising strategies, such as organizing events, soliciting donations from individuals and corporations, and developing planned giving programs. For endowed funds, managing investments for long-term growth is a component.
Prudent financial management is important, particularly for endowed funds. This includes developing and adhering to an investment strategy designed to preserve the principal while generating sufficient income to cover annual scholarship awards and administrative costs. Regular budgeting ensures that funds are allocated appropriately and sustainably.
Compliance with legal and tax obligations is a continuous requirement, especially for independent non-profits. Organizations recognized under Section 501(c)(3) must file an annual information return with the IRS, typically Form 990, 990-EZ, or 990-N, depending on their gross receipts and total assets. Failure to file required annual returns for three consecutive years can result in automatic revocation of tax-exempt status. Additionally, state charity registrations and other state-specific reporting requirements must be met. For Donor-Advised Funds, the sponsoring organization typically handles much of the compliance and reporting.
Measuring the impact of the scholarship fund demonstrates its effectiveness and informs future decisions. This involves tracking the progress of scholarship recipients, evaluating academic performance, graduation rates, and career outcomes. Collecting data on the reduction in student loan dependency can also highlight the economic benefits provided by the scholarships. Regular evaluation helps ensure that the fund is achieving its objectives and making a meaningful difference in students’ lives.