Why Your Scholarship Program Needs a Strong Policy in 2025
2025 is shaping up to be a year of unprecedented challenges for scholarship providers. Organizations are facing a perfect storm: heightened regulatory scrutiny, attacks on DEI-related criteria, uncertainty around the Department of Education's future, and students experiencing greater financial need than ever before.
Amid this turbulence, one thing has become crystal clear: a robust scholarship program policy isn't just good practice—it's essential protection for your organization.
The Regulatory Landscape is Shifting
Scholarship funds have always been highly regulated by the IRS. For many scholarship providers, the Pension Protection Act of 2006 established specific requirements for donor involvement, selection committee composition, and proper documentation. But today's landscape presents new challenges that go beyond these established regulations.
Recent developments have specifically targeted scholarship programs:
Executive orders questioning anything but merit-based criteria in scholarship selection
Threats to eliminate the Department of Education
Increased scrutiny of philanthropy's role in education
Large programs being forced to change their structure or criteria
Political targeting of "activist" philanthropic organizations
Expanded legal definitions of "discriminatory practices" that affect traditional scholarship criteria
Mandatory federal reporting requirements that create significant administrative burden
New state-level legislation restricting donor advised funds and educational philanthropy
Audits specifically targeting scholarship programs with identity-based criteria
These changes aren't just theoretical—they're already impacting foundations across the country. Just a week ago, the Chronicle of Philanthropy reported on how the Gates Foundation significantly altered the eligibility criteria for its signature Gates Scholarship program.
Scholarship programs are particularly vulnerable because they operate at the intersection of philanthropy, education, equity, and grants to individuals—all areas facing increased scrutiny.
The Cascading Impact on Scholarship Programs
The consequences of these changes extend far beyond just regulatory compliance:
Diminished Financial Resources
Increased legal expenses from defending program practices
Potential penalties and fines from adverse audit findings
Possible reduction in donor contributions due to uncertainty
Costs associated with staff departures as program managers feel overwhelmed
Unforeseen technology expenses for urgent compliance upgrades
Wasted Operational Capacity
Demands of managing multiple audit requests simultaneously
Time investment in retraining staff on rapidly changing requirements
Effort required to rewrite program materials and agreements
Frequent consultations with legal counsel
Disruptions caused by redesigning selection processes mid-cycle
Erosion of Team Well-being
Heightened stress levels among scholarship staff navigating uncertain futures
Increased risk of executive burnout from constant crisis management
Decline in team morale as work becomes reactive rather than focused on mission
Fear that programs (and positions) may be eliminated
Emotional strain from supporting anxious students and families
Curtailed Programmatic Flexibility
Reduced ability to adapt program design to evolving needs
Suppressed creativity in developing innovative solutions for students
Increased reluctance to explore new approaches due to compliance concerns
Narrower interpretation of previously accepted methodologies
Compromised Ability to Serve
Fewer students supported as resources are diverted to compliance
Lower individual scholarship amounts due to resource reallocation
Delayed award disbursements due to prolonged review processes
Reduced capacity to support students with the greatest need
Weakened partnerships with educational institutions
What Makes a Strong Scholarship Policy
After reviewing numerous scholarship policies from diverse organizations from across the country, we've identified the essential components that create a strong foundation for your program:
Board Approval and Governance
Your policy should clearly establish:
Who approves scholarship funds and criteria (typically your board of directors)
Timeline for approvals of new funds and changes to existing funds
Clear procedures for how scholarship funds are created and updated
Process for handling exceptions or special circumstances
Emergency protocols for responding to regulatory changes
Selection Committee Requirements
Your policy must address:
Committee composition (ensuring no donor control)
Training requirements for committee members
Conflict of interest and confidentiality procedures
Documentation of selection process and decisions
Resilient selection criteria that can withstand shifting interpretations
Application and Selection Processes
Strong policies include:
Clear guidelines on what information can and cannot be collected
Documentation requirements for applicants
Established evaluation criteria and scoring systems
Positioning on the use of AI
Procedures for notifying recipients and non-recipients
Alternative pathways when primary processes face challenges
Fund Administration
Your policy should cover:
Fee structure for scholarship administration
Annual award amount determination procedures
Guidelines for investment and growth of scholarship funds
Options for fund release or closure if necessary
Contingency plans for regulatory disruptions
Future phases of management, including fund succession planning
Disbursement Procedures
Effective policies outline:
Payment schedules and methods
Requirements for maintaining eligibility (such as academic standing)
Procedures for deferrals and leaves of absence
Clear conditions for scholarship cancellation
Alternative disbursement methods if primary channels are disrupted
Student and Donor Engagement
Your policy should clearly define the parameters for interaction between scholarship recipients and donors, including:
Permissions and protocols for if, when, and how donors can engage with student recipients they fund (e.g., thank you notes, attendance at specific events).
Guidelines on what types of communication are permissible and what boundaries must be maintained to protect student privacy and avoid undue influence.
Processes for facilitating appropriate engagement while ensuring compliance and ethical considerations are met.
Recordkeeping Policies
Your policy should outline the organization's procedures for retaining applicant and student records, which may also be referenced in a broader organizational recordkeeping policy. This includes:
Specified retention periods for different types of data, adhering to legal and regulatory requirements.
Secure storage methods for both electronic and (if any) physical records.
Protocols for data destruction once retention periods have expired.
Clear guidelines on who has access to these records and under what circumstances.
Looking at exemplary policies, we see how these elements work together to create a comprehensive framework that both protects the organization and empowers its scholarship program.
Beyond Compliance—How Strong Policies Support Impact
While regulatory compliance might be the immediate motivation, the benefits of a strong policy extend far beyond avoiding audit troubles:
Clarity of Purpose
A well-crafted policy forces your organization to define exactly why you offer scholarships and how they align with your mission. This clarity helps everyone—from board members to staff to donors—understand the purpose and importance of your scholarship program.
When foundations clearly articulate their scholarship program's purpose, we've seen them make more strategic decisions about which funds to accept, how to structure their application and selection processes, and where to focus their outreach efforts.
Improved Student Experience
Clear policies create consistency in how students are selected, notified, and supported. This consistency enhances the student experience and contributes to the overall effectiveness of your scholarships.
With a well-defined policy, organizations can often anticipate improvements in student engagement, satisfaction, and persistence in their academic pursuits. For example, one community foundation reported that after implementing a comprehensive policy, their scholarship renewal rates saw a notable increase as students gained a clearer understanding of the expectations and guidelines for maintaining their awards.
Donor Retention and Engagement
Transparent policies reassure donors that their funds are being managed responsibly. When donors understand the governance structure and selection processes, they're more likely to continue supporting your scholarship program and even increase their giving.
Many foundations have found that clearly documenting donor engagement opportunities—such as attendance at scholarship events or receiving updates from recipients—has improved donor satisfaction and retention.
Administrative Efficiency
Documented processes reduce the time staff spends on routine decisions and troubleshooting. This efficiency allows your team to focus on more strategic aspects of your scholarship program, such as outreach and impact measurement.
Crisis Resilience
Organizations with robust policies have demonstrated remarkable resilience when facing regulatory challenges. Their clear documentation and consistent practices provide a strong foundation from which to respond to external pressures without compromising their core mission.
Getting Started with Policy Development
Policies should be easily understood by all stakeholder groups, including staff, donors, and students. They won’t get followed or implemented if they’re too difficult or confusing or full of legalese.
Whether you're creating a policy from scratch or updating an existing one, here are the steps to take:
For Organizations Without Policies
Identify your program purpose: Everything you do should align with this.
Research IRS requirements: Make sure you understand the baseline legal requirements.
Review peer policies: Look at examples from similar organizations.
Draft initial policy: Focus on the core elements outlined above.
Get board approval: This is non-negotiable for proper governance.
Create crisis response protocols: Prepare for potential regulatory challenges.
For Organizations with Existing Policies
Conduct a self-audit: Compare your written policy to your actual practices.
Identify "yellow flags": Note any discrepancies or areas that might invite scrutiny.
Update documentation: Make sure fund agreements match your policy.
Close compliance gaps: Prioritize addressing any areas where you're not meeting IRS requirements.
Implement training: Ensure all staff understand the updated policy.
Develop contingency plans: Prepare for multiple regulatory scenarios.
Timeline for Implementation
Don't wait for an audit notice to arrive, or for a complaint to the IRS to force your hand (as the Gates Foundation experienced). The time to act is now:
Immediate (Next 30 Days): Complete your policy self-audit
Short-term (60 Days): Update or create your policy and get board approval
Medium-term (90 Days): Audit all fund documentation and make necessary updates
Long-term (120+ Days): Implement new procedures and train staff
The Opportunity Within the Crisis
While the current environment certainly presents challenges, it also creates an unprecedented opportunity to strengthen your scholarship program. By taking proactive steps to develop or enhance your policy, you're not just protecting your organization from potential audit problems—you're building a more effective, impactful scholarship program.
The foundations that thrive in this new landscape will be those that view this moment as a catalyst for positive change rather than just a compliance exercise.
Now is the time to look under the hood of your scholarship program, identify areas for improvement, and take action. The students you serve and the donors who support you deserve nothing less.
Ready to get started?
Join Students First Consulting for an upcoming FREE webinar:
Navigating Philanthropy's Scholarship Crisis: Creating Audit-Ready, Impactful Programs
Wednesday, May 21
2:00 pm EST/11:00 am PST
We'll walk through practical steps to strengthen your entire scholarship program—from policy development to documentation practices to donor engagement strategies.
Share this information with your leadership team and colleagues who manage scholarship programs. Together, we can turn this crisis into an opportunity to make philanthropy's educational impact stronger than ever.
