How to Start a Scholarship Fund
Creating a scholarship fund can be one of the most rewarding ways to invest in the future. Whether you want to honor a loved one, support students in a particular field, or give back to your community, the process involves more than just setting aside money. You’ll need to choose the right setup, work with key partners, and establish a plan for ongoing management.
Step 1: Decide on the Scholarship’s Purpose and Scope
Before getting into the legal and financial details, spend time defining the heart of your scholarship.
Ask yourself:
- Who do you want to help? First-generation college students? STEM majors? Local high school graduates?
- What criteria matter most? GPA, field of study, financial need, extracurricular involvement, or community service?
- How will the award work? Will it be a one-time grant, renewable each year, or given to multiple recipients?
This clarity is important because it drives every decision that follows—from the size of your fund to who will help you administer it.
Step 2: Bring in the Right People
A scholarship fund works best when you have the right team in place from the start:
- An attorney to draft agreements and ensure compliance with tax and charitable laws.
- An accountant to guide you on funding, investments, and required filings.
- A partner organization (school, community foundation, or nonprofit) to handle day-to-day administration.
- An investment manager if you’re endowing the scholarship and need to grow the funds over time.
You don’t have to involve all of these people in every setup, but at least one or two will be essential to keep your scholarship legally sound and financially sustainable.
Step 3: Choose the Right Setup for Your Goals
There’s no one-size-fits-all way to set up a scholarship. Your choice depends on how much control you want, how involved you plan to be, and how much funding you have available. There are four common ways to establish a Scholarship Fund:
Through a University or School
Some donors work directly with a university or high school—they contribute funds, and the institution handles applications, selection, and disbursement. This is simple but limits you to students in that school and usually requires following their internal criteria.
Through a Community Foundation
Community Foundations are nonprofit organizations specialize in managing charitable funds, so they take care of the legal, administrative, and investment work. They can also help run the application process and make sure your scholarship follows all required rules.
Through a Private Foundation
A Private Foundation provides full control and funding for your scholarship. This allows you to set every rule, manage your own selection committee, and operate nationally or even internationally. But it comes with heavier compliance, costs, and administrative responsibility.
Through an Existing Nonprofit
You can also partner with an existing nonprofit that shares your mission, letting them manage the scholarship within their programs. This is a good option if you want your gift to fit into a larger, established initiative.
Step 4: Decide How the Money Will Work
Your funding approach will shape the life of your scholarship:
- Endowed scholarship: You invest a lump sum, and only the earnings are used for awards—allowing the fund to exist indefinitely.
- Annual scholarship: You contribute each year and distribute the funds until they run out. This is easier to start but not permanent.
- Hybrid approach: You endow part of the fund for long-term stability while also funding current awards right away.
As a rule of thumb, a $25,000–$50,000 endowment might support a $1,000–$2,000 annual scholarship, assuming a 4–5% payout rate.
Step 5: Refine the Selection Process
Whether you’re reviewing applications yourself or leaving it to a partner, it’s important to set clear, objective criteria.
Decide how applications will be collected—through a school’s system, an online form, or a paper application—and who will review them.
If you’re personally involved in selecting winners, put a conflict-of-interest policy in place, especially if friends, relatives, or acquaintances might apply. This protects the integrity of your award and keeps it compliant with IRS guidelines.
Step 6: Ongoing Management
Once the first scholarship is awarded, your work isn’t done. A well-run scholarship needs:
- Annual review of eligibility criteria to keep it relevant.
- Funding oversight to ensure awards can continue as planned.
- Application cycle management to stay on schedule each year.
- Impact tracking to see and share the difference you’re making.
Some donors also keep in touch with recipients, creating an alumni network that adds a personal connection to the financial support.
The Tax Benefits
If the scholarship is given through a qualified charitable organization (e.g., a university, community foundation, or a 501(c)(3) nonprofit), contributions are generally tax-deductible as charitable donations, subject to IRS limits.
If a scholarship is given directly to a student outside of the qualified charitable organization, the IRS may treat this as a personal gift which means you won’t receive a tax deduction.
Investments within the fund generally grow tax-free due to the non-profit status.
Tax Considerations for the Recipient
- Scholarship funds used for qualified educational expenses (tuition, required fees, books, and supplies) are not taxable to the student.
- Amounts used for room, board, or other non-qualified expenses are considered taxable income to the recipient.
What You Can't Do
These are not permitted in order to qualify for tax and legal benefits:
Controlling the Award for Personal Benefit. For example, Requiring that recipients be related to you, your employees, or your board members.
Vague or Discriminatory Selection Criteria. Criteria must be objective and non-discriminatory (race, religion, gender, etc., unless tied to a legitimate charitable purpose under the law).
Ignoring IRS Rules for Private Foundations. Failure to file Form 990-PF, exceeding administrative expense limits, or making prohibited grants.
Overlooking State-Level Rules: Many states require charities to register before soliciting funds or making awards.