According to statistics, the United States awards about 1.7 million scholarships yearly. The budget for these scholarships is about $53.4 billion. Private entities spend about $7.4 billion, and the US Department of education also provides annual financial aid of about $46 billion. Although, there are laws and regulations affecting scholarship programs and fund disbursement in the USA.
Thus, I will elaborate on the rule for scholarships, scholarship regulations, scholarship restrictions, and legal requirements affecting scholarship programs.
Rules for Scholarships and Tax Payment
Just like other practical areas have according to legal source Lawrina, laws guiding their operations in the US, so is every higher education scholarship program in the US.
- Federal nondiscrimination law
The federal nondiscrimination law includes constitutional principles and statutory principles. The constitutional principles govern public institutions receiving federal funding, while the statutory principles govern public and private institutions receiving federal funding. On the other hand, some similar statutory rules govern private philanthropists or non-profit organizations.
Especially in scholarship cases, public institutions have to avoid intentional and facial or characteristics discrimination when making their scholarship regulations. Also, statutory laws governing institutions receiving federal funding include:
- Title VI of 1964 Civic Right Act – Prohibits discrimination based on nationality, color, and race.
- Title IX of the 1972 Education amendments - Forbids sex discrimination in education, including sexual orientation, pregnancy, and gender identity.
- Section 504 of the 1973 Rehabilitation Act – Proscribes discrimination against disabled individuals in several contexts, including education.
Though these statutory laws do not affect Philanthropists and private organizations, however, they are concerned with some similar statutory principles like:
- Section 1981 of the 1866 Civic Right Act – Protect the right to create and execute discrimination-free contracts (scholarships).
- Section 1985 of the 1866 Civic Right Act – Forbids private and public conspiracies that interfere with civic rights.
- Legal consideration on Discrimination-based Cases
In reviewing a discrimination case, there are two vital considerations. First, the type of scholarship awarded and the body that oversees the scholarship program. If the scholarship includes ethnicity, race, gender, and sex, it has to justify the aim if challenged in the court.
Another law that applies to scholarship programs is;
- Federal Tax Laws and Scholarship Restrictions
According to Finaid, scholarships or fellowships are tax-free for a university degree candidate if the award is used to cater for tuition, books, equipment, and supplies for one fiscal year or more. Finaid further states that some fellowship and scholarships opportunities are taxable expenditures. For instance, funds used for living expenses/stipends or renting a room.
However, some restrictions guard against using the term scholarship as a non-taxable expenditure by non-private organizations.
Therefore, to exempt a private foundation scholarship from tax according to College Board and National Scholarship Providers Association, it must qualify for one of the following exemptions.
- If it is created to achieve a specific goal, produce a report, or improve skills for qualified students selected from the public and it further satisfies the following:
- If it is awarded on an objective or nondiscriminatory basis
- To utilize the fund for study in an education institution
- Follows a process of getting an agreement in advance by IRS
- The award is not includable as a gross income
- Scholarships that do not cater for any of the grantee's future activities and do not have a condition on how the recipient should spend the funds.
- The scholarship is available for purposes other than study, travel, or closely related activities.
- Sending scholarship awards from a private entity to any tax-exempt organization like an educational institution to monitor, carry out projects, and handle the selection process for allocated grants.
- Private entity scholarship awards are granted to a government body that has satisfied the IRS beforehand that the scholarship is for a charitable purpose and used by an individual. And periodically, the government body requests reports from the grantee and investigates any jeopardized grant.
Let’s take a look at legal requirements for scholarship programs also.
- Responsibilities and Legal Requirements for Scholarships Programs Providers
Scholarship programs can be made available by the government, private organizations, and higher institutions. However, there are instances where private organization partners with higher institutions, and matters arise on who bears the legal obligations and what they are. The Office for Civil Rights (OCR) has clarifications on this.
- Office for Civil Rights says that all institutional actions are subject to the Federal nondiscriminatory law even if the program is funded by a private entity. And as long as the educational institution contributes significant assistance (non necessarily monetarily) in awarding the private funding.
- The participation of institutions can be in several ways, and the participation level determines the extent to which they will be scrutinized under the federal nondiscriminatory law. Therefore, whether the institution will be responsible for the financial aid depends on the following:
- Level of involvement in providing notable backing to the privately funded program.
- Whether the institution is involved or sets criteria, or is in charge of selecting the private funds and recipients.
- If the institution supplies information or resources to the privately funded program that it does not provide to other scholarship programs.
Therefore, the following governs both parties;
- Case 1
- A provider (private entity) bears legal responsibility if it administers its scholarship program directly to students.
- Or when the institutions (example: universities) only promote the opportunity without participating in the award process.
- Case 2
- An institution, for instance, a university, bears legal responsibility if it takes private financial aid for and administers its scholarship programs.
- Or when an institution accepts scholarship packages intended to support its institution specifically.
- Case 3
- The institution and provider may share legal responsibility if there is a joint selection criteria and/or selection of recipients.
- Or if the institution makes available notable/non-routine resources or information to the scholarship provider.
- Or if the institution administers the private scholarship programs.
Conclusively, scholarship is a vital tool that helps the government and institutions and government to achieve specific goals to solve societal problems. It also helps low-income students to pay the fees required for university and achieve their dreams. However, it is imperative for a scholarship fund or awarding bodies to abide by the laws and regulations affecting scholarship programs.