How to Run a Compliant Scholarship Award Process Under Section 25F

The scholarship award process is where Section 25F compliance is most visible — and where the most consequential errors occur. An award process that violates the no-earmarking rule or fails to maintain arm's-length documentation can result in the loss of the SGO's approved status, which means donors lose their tax credits retroactively.

This post walks through what a compliant award process looks like in practice.

The Statutory Requirements

Section 25F imposes three specific requirements on the scholarship award process:

No Earmarking. Scholarship awards cannot be conditioned on a donor's identity, the donor's preferences, or a donor's request that a scholarship benefit a specific student or a student at a specific school. This prohibition applies to explicit earmarking ("please use my donation to help the Johnson family") and to structural arrangements that functionally create earmarking (allocating scholarship funds by school in proportion to donations from that school's community).

Multi-Student, Multi-School Distribution. Scholarships must be awarded to ten or more students who do not all attend the same school. This is both a minimum number requirement and a distribution requirement. An SGO that awards ten scholarships all at the same school violates the multi-school requirement even if it technically meets the ten-student minimum.

Arm's-Length Award Decisions. The statute does not use the phrase "arm's-length" directly, but the combination of the no-earmarking prohibition and the multi-school distribution requirement creates an implicit arm's-length standard: award decisions must be made by a process that is genuinely independent of donor preferences and that results in awards distributed across multiple schools.

Structuring the Award Committee

The award committee is the entity that makes scholarship decisions. Its structure is important for compliance.

Independence from donors. Award committee members who are also major donors to the SGO create an independence problem. The committee's decisions may be — or may appear to be — influenced by the donor-members' interests in how their contributions are used. Best practice is to maintain clear separation between the donor development function and the award decision function.

Independence from specific schools. Award committee members who are employed by or closely affiliated with specific schools that receive scholarship recipients create a similar problem. A committee member who is the principal of School A has an interest in ensuring that scholarship awards flow to School A's students. Best practice is either to avoid school-affiliated members or to recuse them from decisions affecting their school.

Documented process. The committee must document its decisions: which applications it reviewed, what criteria it applied, and how those criteria resulted in the awards made. Documentation does not need to be elaborate — a committee meeting record that identifies the applications reviewed and confirms the decision criteria were applied is sufficient. But no documentation creates an audit vulnerability.

The Application Process

The scholarship application process is the input to the award decision. A compliant application process:

Makes awards available to all eligible students, not just those associated with the SGO's founding community. An SGO formed by a specific church that only markets its scholarship program to that church's community is creating earmarking risk through selection bias — the award process may be formally arm's-length while the applicant pool is functionally limited to a single community.

Collects income verification documentation upfront. The eligibility requirement — household income at or below 300% of area median gross income — must be verified before an award is made. Verification after the fact creates both compliance risk and administrative burden. The application process should collect the documentation necessary to verify eligibility as part of the application.

Gives returning students and siblings priority in the manner the statute specifies. Section 25F creates a priority system: returning scholarship recipients (students who received a scholarship in a prior year) and their siblings are prioritized in the award process. This priority must be systematically applied — it cannot be ad hoc.

Does not collect information that would allow awards to be conditioned on school preference. If the application asks "which school does your student attend" and the award committee can see that information when making award decisions, the process has a structural earmarking risk. Either remove that field from the application visible to the committee, or implement a process where school information is collected but not visible to the committee during initial deliberations.

Handling Donor Communications

How the SGO communicates with donors about its scholarship program is a compliance question, not just a fundraising question.

What you can say: Your SGO makes scholarship awards to income-eligible students at multiple schools in your service area. Donors receive a tax credit receipt documenting their qualified contribution. The SGO's scholarship committee makes independent award decisions based on the program criteria.

What you cannot say (or imply): That a donor's contribution will benefit a student at a specific school, that a donor can direct their contribution to a specific community or program, or that donors "sponsor" specific students or families.

The hard case in faith communities. In parish communities, donors frequently want their giving to benefit students at "their" school. This is natural — the parish school relationship is central to how many communities understand their giving. The legal prohibition on earmarking does not make this preference disappear; it creates tension between donor expectations and compliance requirements.

The right response to this tension is clear donor communication, not accommodation. Donors should understand, before they give, that the SGO makes independent award decisions and that their contribution cannot be directed to a specific school or student. Many donors will accept this once they understand the federal compliance requirements that make the tax credit possible. Donors who cannot accept it may not be good SGO donors — and that is a better outcome than a compliance violation.

Documenting the Award Cycle

At the end of each scholarship award cycle, the SGO's records should include:

1. The total number of applications received and their schools of attendance 2. The eligibility determination for each application (income verified, documentation collected) 3. The committee's award decisions and the criteria applied 4. The distribution of awards across schools (confirming multi-school compliance) 5. The disbursement records for each award (funds paid to whom, for what qualified expense)

This documentation package is the foundation of the SGO's compliance record. It supports state annual reporting, responds to IRS documentation requests, and demonstrates good faith in the event of a compliance inquiry.

The Most Common Award Process Errors

Based on how other scholarship programs and analogous tax credit programs have been administered, the most common errors in award processes are:

Retrospective earmarking. The award process is formally arm's-length, but after decisions are made, leadership informally redirects awards toward preferred schools or communities. Any post-decision modification to awards must be documented as a separate committee decision, with the same arm's-length process applied.

Insufficient applicant pool diversity. The award process cannot generate multi-school distribution if the applicant pool is concentrated at one school. Outreach must be broad enough to generate a genuinely diverse pool.

Incomplete income verification. Awards are made before income documentation is collected and verified. Incomplete verification means some awards may go to students who do not qualify, which creates both compliance risk and potential recapture issues for the SGO.

Missing committee documentation. The committee makes decisions verbally, without a written record. This is a correctable error going forward, but it cannot be remediated retroactively.

A compliant award process is not bureaucratic for its own sake. The documentation and process requirements exist because the tax credits donors receive are real federal tax benefits — and the system that delivers those benefits must be demonstrably trustworthy.