Is Your Tuition Assistance IRS-Compliant?

Many private schools across the U.S. offer some form of tuition assistance—but few realize they may be out of compliance with IRS regulations. Based on surveys we've conducted with hundreds of schools nationwide, we’ve found that while 96% provide aid, only about half use a formal application process. Even fewer operate with written policies and a board-approved procedure as required by law.

If your school is a 501(c)(3) nonprofit, your tuition assistance program must follow strict IRS guidelines to maintain your tax-exempt status.

WHY COMPLIANCE MATTERS

The IRS requires that all grants—including scholarships and tuition assistance—be awarded on an objective and nondiscriminatory basis. Section 4945(g)(1) of the Internal Revenue Code states that these awards must follow a procedure that:

• Has been approved in advance by the board of the sponsoring organization

• Ensures that all applicants are evaluated using the same criteria

• Is applied consistently and equitably to all applicants

That includes tuition discounts and work scholarships. Just because you call it a “discount” doesn’t mean it’s outside IRS scrutiny.

KEY REQUIREMENTS FOR LEGAL TUITION ASSISTANCE

✅ All Families Must Have the Opportunity to Apply

Every family must be allowed to apply for tuition aid—regardless of whether they are expected to qualify. You cannot selectively offer applications or limit access based on assumptions about a family's financial need.

Include a nondiscrimination clause in your policy, such as:

"This school does not discriminate based on gender, race, color, or national or ethnic origin in the award of any tuition assistance. Tuition assistance or tuition payments given to the school that are designated for a specific family or recipient are not considered tax-deductible."

 ✅ Use a Standard Application and Consistent Criteria 

All applicants within a fund must complete the same application and be evaluated using the same process and formulas. That said, you can have multiple aid funds with distinct eligibility criteria. For example:

• A General Tuition Aid Fund may require only demonstrated financial need.

• A Church Partner Fund may require both financial need and church membership.

Each fund must still evaluate all its applicants using a consistent method. ✅ Exceptions Must Be Documented

It’s reasonable to allow for special circumstances—but those exceptions must be formalized. Requests should be submitted in writing, reviewed by your tuition aid committee, and recorded with a written explanation placed in the applicant’s file. This protects both the family and the school.

✅ Treat Applicants Consistently (Not Necessarily Equally)

Applicants must be evaluated using the same formulas and guidelines—but that doesn’t mean everyone receives the same amount. For instance, you might offer a Pastor’s Scholarship that’s only available to pastors living within 10 miles of your campus. That’s legal, as long as every pastor applicant is treated consistently under the same rules.

Consistency = legal. Equality = not required.

✅ Volunteer Hours = Taxable Compensation (Unless Required of All)

Some schools try to recoup aid by requiring families to volunteer a certain number of hours. If this “work” is only required of aid recipients, it could be considered bartered compensation—which is taxable income and must be treated accordingly. To avoid complications, either:

• Require volunteer hours of all families, or

• Treat the hours as paid work subject to tax withholding

✅ Keep Detailed, Confidential Records

Documentation is your legal safety net. Maintain confidential files that include:

• The family’s financial analysis (e.g., from a verification service like BeneFAQ)

• Application and award documents

• Written explanations of exceptions

• Meeting notes from the tuition committee

• Any correspondence with the family

Access should be restricted to the committee, administrator, and treasurer.

Need Help?

BeneFAQ by SchoolRIGHT is a powerful tuition aid verification system that ensures your school’s process is consistent, objective, and IRS-compliant. We help you evaluate need fairly and defend your decisions with clarity.

Don’t leave compliance to chance. Let us help you do it right.Reach out today to learn more.

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