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A Major School NO-NO in Granting Financial Aid

"I will not be turning the items in, (my school) has already helped me."This was a recent email we received from a parent who had applied for financial aid to her school through our tuition aid verification service, CFS, but did not turn in any of the requested documentation necessary for us to complete the verification of her application. This is not the fist time we have heard this sort of reply from a parent and yet it raises serious legal concerns of which schools, that offer financial aid, should be reminded.

Grant and Scholarship Procedures

The main laws affecting the awarding of scholarships are the laws relating to private foundations and non-profit organizations. For example, section 4945(g)(1) of the Internal Revenue Code 1 specifies that all grants (read scholarships or tuition aid) are awarded on an objective and nondiscriminatory basis using a procedure that has been approved in advance by the board of directors of the sponsoring organization and that has been designed to ensure that all such grants meet the IRS requirements for scholarship programs found in paragraphs (1), (2), or (3) of section 4945(g) of the Internal Revenue Code.

Who Can & Cannot Receive Aid?

Accordingly, the following are IRS requirements for the awarding of scholarships or financial aid:

  • The scholarship/aid must be awarded on an objective and nondiscriminatory basis.

  • No grants may be awarded to an officer, manager or trustee of the organization, nor to a member of the selection committee, nor to a substantial contributor, nor to certain US government officials.

  • Family members of the above mentioned individuals are also not eligible to receive grants.

  • The group of applicants from which the recipients are selected must be sufficiently broad as to be considered a charitable class.

While we cannot interpret the law for your school and situation, we have learned through the years of providing comprehensive tuition aid verification for private schools (since 1996 for pre-dominantly Christian K-12 school settings) is that a school may be endangering their 501(c)3 status by knowingly or unknowingly ignoring or veering from the above mentioned IRS requirements for granting financial aid awards. Schools should treat each applicant the exact same way.

Our advice to private schools offering tuition aid is to have written procedures for awarding such aid. This should include that your school will utilize a third-party vendor such as SchoolRIGHT's CFS-BeneFAQ service who will provide the same application and verification processes to all applicants BEFORE any award is determined by the school. Once verification is complete, the school may proceed to award aid to the applicant family. To provide assistance without following IRS requirements may mean consequences imposed by the IRS such as fines or disqualification of 501(c)3 standing.

Consideration of circumventing the proper process is not worth the potential penalty​ should you ever be audited regarding the tuition aid you have granted.

Do you use a third-party vendor to help in this matter. Our service is affordable, fast, accurate, and friendly. Contact us today to learn more.

​Authored by Clint Holden

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