Launching a Scholarship Fund: A Comprehensive Guide

Interested in starting a scholarship fund? Creating a scholarship fund is a great way to keep the memory of a lost friend or family member alive, but it can also be an effective way to channel your grief into something positive. Scholarships are a hugely impactful way to support the next generation. Creating them on your own can be tricky, but there are easy solutions available.

Why Establish a Scholarship Fund?

When someone close to you passes away, it’s natural to want to honor their legacy and the memories that mean so much to you. The people we hold dearest leave a lasting impact on our lives and the lives of those around us, so there’s few better ways to honor their memory than by using it to help those in need. You can honor the memory of a loved one, all while providing hope to students who need assistance in funding their education, when you establish a scholarship fund. Your friend or relative will be remembered, and their scholarship will ensure that there are always future generations of people who can make a lasting impact.

Setting up a named scholarship through a foundation helps stretch resources and deliver the best education and experience possible for incredibly talented students. Establishing a scholarship also provides a naming opportunity that’s a very meaningful way to honor people who have had a major impact on your life.

Creating a scholarship fund benefits donors and students. Donors experience the gratification of making a lasting impact on individuals striving for education, which fosters a sense of social responsibility. For students, the benefits are life-changing. Scholarships help ease financial pressures, opening doors to educational opportunities that might otherwise be unattainable.

Dispelling Scholarship Myths

When it comes to scholarships, there are many misconceptions, one of which is that only governments, universities, companies, or professional fundraising managers can initiate them. The good news is that anyone can establish a scholarship or memorial fund.

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Initial Considerations

Before diving into the specifics, it’s essential to lay the groundwork for your scholarship fund:

Defining the Beneficiary

First, you need to spend some time considering the why of your scholarship - who or what, exactly, are you trying to benefit with your scholarship? When establishing a scholarship fund in memory of a loved one, it should line up with that person’s interests, values, and the legacy he or she left behind. Did they have any special hobbies or interests? What were their favorite subjects at school? Contemplating these questions will allow you to create a scholarship fund that authentically commemorates your loved one’s life.

Budget and Timeline

After you’ve chosen whom you want to aid and what type of scholarship fund you want to establish, it’s time to consider other practicalities, namely, your budget and timeline. Would you prefer a renewable scholarship? Or do you want to simply run it one time? Because creating your scholarship fund will ultimately be an output of cash (especially if you are going to be managing it yourself), you need to formulate a realistic and clear budget before you begin. Choose how many students that you’d like to sponsor, and establish a minimum that you’d like to grant. Make sure to include all applicable professional fees in your scholarship fund budget, such as legal costs, marketing expenses, and the cost of potentially reinvesting your fund’s assets.

Management Structure

The third step to creating a scholarship fund is selecting the management structure you would like to use. There are two primary choices: administering the fund directly or using a scholarship management service. The direct approach provides greater freedom and control but is usually expensive and necessitates some familiarity with IRS guidelines and their tax implications. Although this method fast-tracks the establishment process and means you are in compliance with the law, it does not come cheap, and you will have less direct input at the inception of your scholarship fund.

Key Steps to Establishing Your Scholarship

Define Scholarship Eligibility Criteria: One important aspect of getting a scholarship fund up and running is clearly identifying who is able to receive funding. Each scholarship also has certain eligibility requirements students must meet to be awarded. The questions you want your applicants to answer will do a lot of your work for you when deciding who is the best fit for your scholarship. It’s usual to establish an average GPA students must meet in order to qualify, though the grade point average expectation for athletes will look different than it does for those receiving based on merit. For instance, a merit scholarship often needs several recommendation letters from teachers along with a higher GPA. Customize your scholarship to fit the purpose, and always remember your loved one’s legacy. These details will help applicants know what’s expected and give you a solid framework for selecting the most deserving candidate.

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- Examples of eligibility criteria include: field of study, financial need, community involvement, geographical origin, leadership potential, merit, academic achievement and/or other criteria.
Craft a Compelling Scholarship Name: Your scholarship fund’s name is the one thing most people will remember, so choose wisely when deciding what to call it. Many founders of scholarship memorial funds include their loved one’s name in the name of the scholarship itself, but there are plenty of other creative ways to celebrate your loved one’s memory. But whatever way you call attention to your loved one in the title of your scholarship fund, you would be wise to keep clarity and simplicity in mind. You want your scholarship fund’s name to be memorable and easy to pronounce, but also to feel close to your loved one’s spirit and resonate with others.
Assemble a Selection Committee: It’s going to be time-consuming, trying to get through all of the applications, so it’s good to have a small team or committee to help with that process. Make sure to give yourself enough time to review each applicant so that you’re able to make a thoroughly considered decision in time for your chosen deadline. It’s a good idea to make a clear rubric for how the judge will choose who the scholarship recipient is, so the process is fair.
- Consider including family members, friends, educators, or professionals in relevant fields on your committee.
Register Your Scholarship Fund: Registering your scholarship fund with a community foundation is one of the easiest ways, but you may have less of a say in the qualification criteria you want to use. To locate accredited community foundations in your state or local area, you can use this community foundation locator. Another option would be to partner with a school, college, or a university to create an academic scholarship, but many require you to have allocated a certain amount of money in a fund. You can also apply to be recognized as an official nonprofit, so any of your scholarship fund’s donors would get tax benefits. In walking yourself through this process, there are some IRS-related factors pertaining to state and federal law and how you award (or don’t) recipients. It’s worth noting once again that there are specific taxes as well as IRS rules that need to be observed when setting up a scholarship fund. This is particularly important if you plan to manage your fund directly, as scholarship management services will handle these legal technicalities for you. Once you are set up as a private foundation, you must complete legal documents to show that your scholarship fund is eligible to be considered tax-exempt. Registration forms must also be filled out and submitted to your state and federal authorities. You’ll need to demonstrate that your scholarship will be awarded in a fair way, with procedures for how recipients will be selected.
Fundraising: One of the most important parts of setting up a scholarship fund is knowing how to receive funding. If you’re having trouble gathering the money you need, online crowdfunding platforms can help. Just build your page, share your story, and spread the word about your fundraiser! Donations will flow directly to your beneficiary’s bank account, and you don’t have to reach your fundraising goal to access the cash.

Funding Options and Minimums

Several options exist for creating a scholarship, each with varying costs:

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Endowing a Scholarship at a Specific University: Donation Minimum: \$50k-\$100k, depending on the school's requirements. Fees: Administrative / setup fees up to 5%. Supports fundraising: No
Creating Your Own Non-Profit: Donation Minimum: Typically \$1k+ to fund the new entity. Fees: Typically, \$5k-10k in legal fees to set up a new entity and achieve non-profit status.

Endowed scholarship funds are designed to be permanent and perpetual and can be created with gifts totaling a minimum amount of \$25,000, contributed in full at the outset or with an initial commitment that is added to over time until the endowment level of \$25,000 is attained. The principal of the fund is invested to produce income, and an annual award is made to a student(s). Annual scholarships can be established with an outright gift of \$1,000. An annual commitment of \$1,000 per year for four years is recommended, and the annual gift is awarded to recipients over the four-year period.

The minimum to establish a new scholarship fund at the Community Foundation is \$100,000. Donors who wish to support scholarships with a smaller initial gift may do so through the Houston Opportunity Scholarship. The minimum to establish a scholarship fund is \$25,000.

Promoting Your Scholarship

Spreading the word is key to attracting the right applicants. Here’s what you can do to get started:

Reach out to schools (e.g., high schools, colleges, universities).
Connect with local organizations (e.g., community centers, libraries, student groups).

IRS Guidelines and Tax Implications

The IRS has strict guidelines that specify how to ensure that scholarships are awarded based on merit (and not as a lottery) and clearly defines the permitted expenses for which scholarship funds can be used.

IRS guidelines for starting a scholarship fund will differ based on whether your scholarship is an individual grant or part of a scholarship program at your organization; businesses that help the community through scholarship funds are held to incredibly high standards by the IRS and are only eligible for tax-exemption under certain circumstances, to ensure that the programs are being run for the benefit of the community and not the benefit of the company.

Some of the most important IRS requirements for scholarship funds include:

Your scholarship must provide objective criteria for selection, meaning recipients cannot be chosen arbitrarily or based on personal relationships alone.
Scholarship recipients generally must be enrolled as students at accredited educational institutions, though eligible institutions can include undergraduate universities, graduate schools, technical programs, and certain vocational training centers.
To give a scholarship that is tax-free to recipients, the funds must support genuinely educational expenses such as tuition, fees, books, and required supplies. Scholarships to cover living expenses or other needs may be taxable for the student.

Tax Deductibility

Contributions to a scholarship program may be tax deductible if the pool of eligible recipients constitutes a sufficiently broad “charitable class” as defined by the IRS. That means donors can’t earmark funds for specific individuals.

One of the most attractive benefits of establishing a scholarship fund through the Community Foundation is the immediate tax advantages available to donors. When you contribute assets to your scholarship fund, if you meet the criteria established above, your contribution will qualify for a charitable tax deduction in the year you make the gift, regardless of when scholarship distributions occur. This tax benefit applies whether you donate cash, appreciated securities, real estate, or other qualifying assets.

This is the kind of charitable giving tax deduction you can expect if you follow IRS guidelines:

Gift type	Deduction limit
Cash donations	Up to 60% of AGI
Appreciated securities	Up to 30% of AGI

The tax benefits can extend beyond your income taxes. By contributing appreciated assets rather than selling them first and donating cash, you may avoid capital gains taxes while receiving a deduction for the full market value of your gift. For donors with substantial estates, establishing a scholarship fund as part of your legacy planning can provide estate tax benefits that amplify your philanthropic impact.

Partnering with a Scholarship Management Organization

There are many ways to set up a scholarship fund. Partnering with a trusted organization helps with tax reporting, ensuring that funds are allocated properly and used for eligible educational expenses, giving peace of mind to both donors and scholarship recipients.

Working with a qualified partner can eliminate the need to create a separate nonprofit organization, reducing complexity and administrative burden. The Community Foundation provides fund oversight, investment management, grant distribution administration, and compliance support-services that would otherwise require significant investment and expertise.

Here's a full list of how a scholarship management platform can help you start a scholarship fund:

You can customize everything about the scholarship - from the eligibility criteria to the topic and application prompt to your selection criteria.
You can create essay, video, or image application prompts.
Your scholarship will be automatically matched to exceptional candidates and bring in highly qualified applicants that meet your scholarship's criteria and goals.
Your donations (and those of your friends, family, and community) are 100% tax deductible.
100% of your donations go directly to deserving recipients. There are no administrative fees.
You'll get dedicated support reviewing applications.
You'll work directly with a team that has set up scholarship funds for thousands of donors.
By working with a management platform, they ensure your scholarship is compliant with all nonprofit and grant-making regulations.

Awarding the Scholarship

Choosing your scholarship recipient is the most fulfilling part of the entire process! The final step is to select the winner and distribute the funds while following legal guidelines. Here’s what you need to do:

Ensure your selection process is fair using an objective and nondiscriminatory basis and meets legal standards.
Review each submission thoroughly, using your criteria to identify the most deserving candidate.

Major contributors to a scholarship fund are notified annually when the scholarship recipient(s) has been selected and are informed of the name and hometown of the recipient, as well as the amount of the award.

Examples of Memorial Scholarships

The Danny Pepin Memorial Scholarship Fund aims to provide students with \$2,000 over two years, while offering additional financial support.
A scholarship based on a loved one's passion for guitar, funded through crowdfunding.
Scholarships dedicated to graduating seniors pursuing a career in theater or dedicated Taekwondo students, with a fundraising goal of \$45,000.

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