How a Nonprofit Can Set Up a Scholarship

By Laura Payet

How a Nonprofit Can Set Up a Scholarship

By Laura Payet

One way a nonprofit changes lives directly is by offering awards and grants that help students with the financial challenges of attending colleges and universities. If your charitable organization wants to set up a scholarship, these are the basic steps.

Woman typing on a laptop with the word "Scholarship" displayed on the screen

1. Consider and establish the scholarship constituency.

The first step is figuring out which community or class you want to benefit from your scholarship. Some things to consider are if it will go to a certain gender, a certain socioeconomic class, or living in a specific geographic region. If you're particularly interested in an area, like medicine or the arts, you may want your scholarship to be geared towards those students. You can determine the target constituency by identifying personal attributes or particular skills, but it must have some connection to the population the organization serves to be sure it retains its nonprofit status. Be wary of relying on criteria such as race or ethnicity, or consult with an attorney before doing so.

2. Determine how to fund your scholarship.

Next, figure out how to fund your scholarship. You may choose to dedicate a part of your existing budget, or you may wish to raise funds specifically for it. Remember that you must spend any money raised for the award fund on the award itself to protect your nonprofit status. Also remember to factor in the costs required to administer the award when determining how much funding you need. One way to keep down administrative costs and efforts is to fund a program at a particular school, in which case the school itself can administer the program and report to your organization. You must also decide whether you will pay the grant directly to the winning individual or to the institution that student will attend. If you plan to pay the student directly, you must satisfy certain IRS criteria to make sure the funds do not count as taxable income.

3. Establish the application criteria.

Most often, nonprofits award funding based on some combination of the following requirements:

  • Application form
  • Resume
  • Transcript
  • Recommendations
  • Financial need
  • Personal essay
  • Interviews

Whatever you decide, the process must be objective and nondiscriminatory. The program's guidelines should be clear, consistent, and widely available so that the award process is transparent.

4. Create a scholarship committee.

Most organizations depend on a scholarship committee to evaluate the applications, make recommendations about the candidates, and administer the award. Keep in mind that any family members of this committee should be excluded from consideration to prevent a perception of bias. The same goes for family members of the nonprofit's officers, directors, and major donors. It is a good idea to have the committee track the scholarship funds if you decide to disburse them directly to the recipient instead of to an academic institution, to be sure the recipients spends them on their education. One way to do this is to ask the recipient to submit a copy of their transcript.

5. Announce the scholarship.

Once you have secured your funding and defined your award process, your organization is ready to announce the scholarship and solicit applications. Consider where and how to make the announcement to best reach your target audience.

When setting up a scholarship as a nonprofit, keep the potential tax consequences for you and the recipient in mind. It may be beneficial to reach out to an experienced attorney to help you avoid any legal pitfalls.

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