How to Set Up a Scholarship Fund for Your Community

Start with a clear purpose and scope

A successful scholarship begins by answering two questions: who you want to help and why. Define the target population (for example: graduating seniors from a specific high school, first-generation college students, or trades-focused learners), the award size and frequency, and whether the scholarship will be a one-time award or a perpetual endowment.

Be specific. A fund that says “local students” is harder to promote and evaluate than one that funds “graduating seniors of Lincoln High pursuing technical certificates.”

Choose the right legal and operational structure

You have several common options—each has different administrative burdens, tax consequences, and levels of control:

• Partner with a community foundation or fiscal sponsor. This is the lowest-friction option. The foundation handles administration, tax reporting, and investment; you provide the donation and selection criteria. Good choice for most individuals and small groups. See our guide on how to use private foundations without the administrative burden for alternatives and trade-offs (How to Use Private Foundations Without the Administrative Burden).

• Create a scholarship fund inside an existing 501(c)(3). If you already run a nonprofit, you can operate scholarships under that umbrella—still requires strong governance and proper documentation.

• Start a private foundation. Offers maximum control but carries higher costs, annual 5% minimum distribution rules, stricter excise taxes, and extra reporting (Form 990-PF). Private foundations also have tighter self-dealing and grantmaking rules (IRS guidance). This option fits donors wanting long-term control and active grantmaking.

• Donor-advised fund (DAF). Quick to establish and provides immediate tax benefits; grants from the DAF can fund scholarships through qualified organizations. DAF sponsors generally do not allow granting to named individuals, so you’ll likely need a sponsoring charity to distribute awards.

For perpetual funds that aim to pay a fixed annual award, consider an endowment model. If you want to pay $5,000 per year and use a 4% annual spending rule, the approximate endowment target is $125,000 (5,000 / 0.04 = 125,000). For more on endowments and spending rules, see our endowment overview (Endowment).

Tax and compliance basics (U.S.)

• Most donors receive charitable tax deductions only if contributions go to a qualified public charity (a 501(c)(3) recognized by the IRS) rather than to an individual or to a private non-charity vehicle. (IRS, Charities & Nonprofits)

• If you run your own 501(c)(3), file the correct IRS application (Form 1023 or 1023-EZ) and follow required annual reporting rules (Form 990 or 990-EZ). Private foundations must file Form 990-PF and meet minimum distribution rules. (IRS, Publication 557; IRS Forms 990 instructions, 2025)

• Scholarship awards to students are generally tax-free if used for qualified education expenses (tuition, fees, required books and supplies) under Internal Revenue Code rules; amounts used for room, board, or unrelated living expenses are often taxable to the recipient. See IRS Publication 970 for current rules on scholarship tax treatment. (IRS, Pub. 970, 2025)

Before you incorporate or accept public donations, consult a nonprofit attorney or CPA to determine which structure fits your goals and to ensure compliance with state charitable solicitation laws.

Build governance, policies, and fair selection processes

Good governance protects donors, the organization, and applicants.

• Create written bylaws or a fund agreement specifying purpose, award criteria, selection process, conflict-of-interest rules, and record-retention policies.

• Form a selection committee with at least three unrelated members to reduce perceptions of bias; include educators or community leaders if possible.

• Build a scoring rubric that weights objective criteria (GPA, financial need) and subjective factors (essay quality, leadership). Publish the rubric or selection criteria to keep the process transparent.

• Keep careful records to substantiate awards and compliance if audited. Document how funds were spent and how candidates were evaluated.

Design the application and award process

Make the application straightforward.

• Required items typically include: application form, resume or activities list, transcript, FAFSA or financial-need statement (if applicable), personal statement, and two references.

• Define deadlines, review timelines, interview steps (if used), and notification procedures. Provide an award letter template that lists award amount, permitted uses, disbursement method, reporting requirements, and any conditions (e.g., enrollment verification).

Sample checklist for applicants:

• Completed application form
• Official transcript
• Personal statement (500–750 words)
• Two references (one academic or employer)
• Proof of enrollment/offer letter (upon award)

Funding strategy and sustainability

Decide whether the fund will use a spend-down model (award principal until it’s depleted) or an endowment/perpetual model (invest principal, spend a percentage each year).

• Quick math: Annual award ÷ spending rate = required corpus. For example, a $2,500 annual award at a 4% spending rate needs about $62,500 in the endowment.

• For starter funds, set a reasonable fundraising target that funds the first 2–3 years of awards and administrative costs. Use matching-period campaigns with local businesses to increase donor participation.

• Maintain a small reserve for administration (communications, background checks, payment processing). If partnering with a community foundation, administrative fees may range from 0.25% to 1.5% of assets annually.

Investment policy and risk management

Document an investment policy statement (IPS) that defines objectives, spending rate, asset allocation, rebalancing rules, and who the investment advisor is. For small funds with limited staff, partnering with a foundation or using pooled investment options simplifies this step.

Promotion and outreach

To reach applicants and donors, use a multichannel plan:

• Share the scholarship on local school counselor email lists and career centers.
• Use local media and community groups (churches, rotary clubs).
• Post on social media and the scholarship page of a partner foundation.

Leverage existing advice about finding scholarships and maximizing outreach—see our scholarship resource roundup for applicant-focused promotion (Scholarships and Grants: Finding Hidden Funding).

Administration: payouts, tracking, and reporting

• Verify enrollment before disbursing funds—most organizations pay tuition directly to the school.
• If paying living expenses or stipends, outline reporting expectations to avoid tax surprises for recipients.
• Annual reporting: provide donors with an impact report and file required IRS returns. Keep records for at least seven years.

Measure impact and iterate

Collect basic metrics: number of applicants, awards made, retention or graduation rates of recipients, geographic reach, and money raised. Every 2–3 years, convene stakeholders to evaluate whether your criteria and award size remain aligned with community needs.

Common pitfalls and how to avoid them

• Overly narrow eligibility: too restrictive criteria reduce applicant pools. Keep balance between focus and accessibility.
• Weak governance: no written policies invites disputes and compliance risk.
• Neglecting sustainability: failing to plan for ongoing fundraising threatens continuity.

Real-world example (typical timeline)

Month 1–2: Define mission, choose structure, consult attorney/CPA
Month 3–4: Draft bylaws/agreements and establish account or sponsor relationship
Month 5–6: Build application materials, create rubric, launch fundraising
Month 7–12: Accept applications, select finalists, award and disburse funds

Additional resources and citations

• National Scholarship Providers Association — research and best practices: https://www.scholarshipproviders.org/ (NSPA, 2024)
• IRS, Charities & Nonprofits, and guidance on tax-exempt organizations (see Publication 557 and Form 1023 instructions) (IRS, 2025)
• IRS Publication 970, Tax Benefits for Education—scholarship tax treatment (IRS, Pub. 970, 2025)

Professional tips (from my practice)

• Start simple: partner with a trusted fiscal sponsor if you’re unsure about long-term administration. In several client cases, this cut setup time and legal expenses by more than half.
• Build a communications calendar so each award cycle becomes repeatable and predictable for applicants and donors.
• Invite prior recipients to serve on a future selection panel—this strengthens community ties and improves applicant outreach.

Professional Disclaimer: This article is educational and does not constitute legal or tax advice. Consult a nonprofit attorney or qualified tax advisor before creating or soliciting funds.

By following these steps—defining purpose, choosing an appropriate legal structure, putting governance in place, and planning for sustainability—you can create a scholarship fund that makes measurable, lasting impact in your community.