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For new nonprofits
How to start a scholarship fund
You can start a scholarship two ways: set up a named fund at a community foundation or existing charity, or form your own 501(c)(3).
For most people the community-foundation route is far simpler; your own nonprofit makes sense only at real scale. Here is how to choose, and what the IRS requires either way.
This is general information, not legal or tax advice. Scholarship procedures have specific IRS rules worth confirming.
Two ways to start a scholarship
| Easiest route | A named fund at a community foundation |
| Own-nonprofit route | Your own 501(c)(3), more work and more control |
| IRS rule | Selection must be objective and nondiscriminatory |
| Not allowed | Restricting it to your own family, or picking recipients informally |
Route 1: a fund at a community foundation
The simplest path by far. You create a named scholarship fund at a community foundation or an existing charity, define the criteria, and fund it. They handle the compliance, the selection process, and the payments. For most individuals and families, this is the right answer.
Route 2: your own 501(c)(3)
Forming your own nonprofit gives you full control but takes real work: you incorporate, get an EIN, and file Form 1023, where the IRS reviews your scholarship procedures. Our how-to-start guide and state guides cover formation. This route makes sense when the program is large or ongoing.
The IRS rules that apply either way
- Objective and nondiscriminatory selection. You need clear, fair criteria and a defined pool of eligible applicants.
- An arm's-length committee. Selection should be made by people without a conflict of interest, not informally by the funder.
- No private benefit. You cannot restrict a charitable scholarship to your own family or a pre-chosen person.
Funding and taxes
Decide whether it is a one-time or endowed fund, and how it is replenished. For recipients, scholarships used for tuition and required fees are generally tax-free, while amounts for room and board may be taxable.
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General information for people starting or running a nonprofit, not legal or tax advice. Rules change; confirm specifics with the IRS, your state, or a qualified professional.
Sources: IRS, charitable organizations · IRS, private foundation grants to individuals · councilofnonprofits.org. Verified August 2026.