The 90/10 Spending Requirement

The 90/10 spending requirement is one of the compliance obligations that most surprises organizations when they first encounter it. It requires that at least 90% of the SGO's annual revenues be expended on qualified scholarships — leaving a maximum of 10% for all administrative and fundraising costs combined.

For organizations accustomed to operating with overhead ratios in the 20-30% range, this is a real constraint that requires deliberate planning from before the first donation is accepted.

The annual test

The 90/10 ratio is tested against each year's revenues and expenditures independently. An organization that falls below 90% in year one does not get to "make it up" in year two. A violation in year one is a compliance failure for that year, with potential consequences including state suspension or revocation of approved status.

Loss of approved status means donors cannot claim the federal tax credit for contributions made while the SGO was out of compliance. This is a significant liability — it damages the donor relationship at exactly the moment when trust is most fragile (the early years of the program), and it may require the SGO to notify affected donors of the potential tax credit issue.

The start-up year problem

The most common 90/10 compliance risk is in the first operational year. Formation costs — legal fees, state filing fees, platform setup, training — can be significant. If these are treated as operational expenses of the SGO's first year, they can push the overhead ratio above 10% before the scholarship program has built to any scale.

The right approach: incur formation costs in 2026, before the SGO is an operating organization. Costs incurred before the SGO is approved and operational properly belong to the pre-operating formation period — they are not operational costs subject to the 90/10 test. This requires careful timing of when formation-related activities are contracted and paid.

Real-time monitoring is not optional

An SGO that discovers in December that its overhead ratio has been 15% all year cannot retroactively reduce its overhead. It can accelerate fundraising to increase the denominator — but doing so in the last weeks of the year under compliance pressure is not a position any organization wants to be in.

Monthly 90/10 monitoring — tracking accumulated revenues and expenditures against the required ratio — gives organizations the runway to adjust. An overhead ratio creeping toward 10% in April is a recoverable situation with months of operating time ahead. The same ratio in November is a crisis.

Structuring costs to support compliance

Variable versus fixed costs. Overhead costs that scale with scholarship volume (percentage-based platform fees, per-recipient processing costs) are structurally favorable to 90/10 compliance — they naturally maintain a fixed ratio regardless of program size. Fixed overhead costs (flat monthly fees, salaried staff) become more favorable as scholarship volume grows.

The infrastructure partner model. An SGO that contracts compliance, reporting, and operational functions to an infrastructure partner converts what would otherwise be internal administrative overhead into an external service relationship. Depending on how the fee is structured, infrastructure partner fees may be more favorable to 90/10 ratio management than equivalent internal staffing costs.

Pre-operational investment. Costs that can be incurred before the SGO's first operational year — formation legal fees, platform setup, initial training — should be treated as pre-operating costs rather than year-one overhead.