Scholarships are an excellent opportunity to make a positive impact and support the objectives and mission of your nonprofit. This is particularly true if your organization’s mission is primarily educational in nature. But the benefits aren’t exclusive to educational nonprofits. And, there can be IRS compliance issues for your nonprofit if your program isn’t set up properly, so getting it right is vitally important.
Many people assume that scholarships are the exclusive domain of educationally-oriented nonprofits. Nothing could be farther from the truth. While it’s certainly true that many organizations offering scholarships do so as their main program, many others do so as a furtherance of their particular mission.
The goal of this article isn’t necessarily to encourage you to adopt scholarships as part of your program plan. That being said, scholarships are a great way to further just about any cause or mission you may have. Think about these examples:
- A nonprofit that focuses on endangered species and habitat protection funds a scholarship program for students seeking degrees in biology or conservation.
- A children’s literacy group offers money to students seeking degrees in early-childhood education.
- A religious missions organization provides scholarships to seminary-degree students.
This list could go on page after page. In fact, contrary to what many might expect, the majority of scholarship-offering nonprofits are not exclusively educational in nature.
Establish the scholarship’s purpose in alignment with your organization’s goals. Starting with a clear alignment of purpose helps avoid eligibility and selection issues. If your nonprofits funds scholarships generally as a primary program, this activity supports your educational mission. However, if your mission isn’t primarily educational, alignment is important. The examples above give you some guidance about what we mean here.
Define eligibility rules in compliance with IRS requirements. To start, eligibility criteria must be broad enough to serve a public interest. You can limit the eligible group to the people you wish to serve with your scholarships, such as residents of a city or state. To show that your program doesn’t create unfair advantages, you should also include a plan to publicize your scholarship to reach those who are eligible.
Specify an objective selection process that follows specific guidelines. Recipient selection has a lot of potential for problems and may come under scrutiny. It’s imperative that you take measures to ensure that members of your organization cannot privately benefit from the selection process. Selection criteria need to be objective and non-discriminatory; however, you don’t have to limit the criteria to grades and test scores. You can and should define criteria that align with your purpose and mission, making sure that all criteria are compliant. Different regulations exist for public charities, for private foundations, and for funding scholarships connected to educational institutions and businesses. Non-compliance can result in financial and other penalties.
One of the more important considerations here is making sure your potential universe of beneficiaries is sufficiently large enough. This is highly subjective, and there isn’t a magic number that works for this. It’s really more about making sure what you’re providing isn’t considered prohibited private benefit because the candidate pool only includes a handful of students, or worse, those somehow related to insiders of the nonprofit.
Private foundations have another layer to consider if they are wishing to provide scholarships…namely, IRS regulations require advance approval by the IRS prior to commencing the activity. Quoting directly from the IRS:
Grants to individuals must be made in accordance with procedures approved in advance by the Internal Revenue Service. To secure such approval, a private foundation must demonstrate in its request for advance approval that:
- Its procedure awards grants on an objective and non-discriminatory basis;
- The procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance; and
- The foundation will supervise grants to determine whether grantees have fulfilled the grant terms.
No single procedure or set of procedures is required. Procedures may vary depending upon such factors as the size of the foundation, the amount and purpose of the grants, and the number of recipients.
Approval is based on an evaluation of a foundation’s entire system of standards, procedures, and follow-up. Hence, separate approval for each grant program is not required. Once obtained, such approval applies to any subsequent grant program of the foundation if the procedures under which it is conducted do not differ materially from those described in the original request for approval.
Scholarships are a great way for any nonprofit to advance its mission, whether an educational or non-educational program, or whether public charity or private foundation. The key is knowing best practices, as well as IRS expectations and restrictions.
who subscribe to our free, email newsletter. It’s information that will empower your nonprofit!