Yes, churches can give scholarships. As tax-exempt organizations under Section 501(c)(3), churches are recognized for religious, charitable, and educational purposes, and funding a student’s education fits squarely inside that mission.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. The program just has to serve an educational purpose, choose recipients from a broad enough group using objective criteria, and steer clear of anyone with influence over the church’s affairs.
The Legal Basis
Section 501(c)(3) grants exemption to organizations operated exclusively for religious, charitable, or educational purposes. A church scholarship program sits inside that same exemption, so no separate entity and no special IRS ruling are required to start awarding scholarships.
Churches also get more room to work than most other 501(c)(3) organizations. Under Section 508(c)(1)(A), churches are automatically exempt from the private foundation rules,2Office of the Law Revision Counsel. 26 USC 508 – Special Rules With Respect to Section 501(c)(3) Organizations and they are classified as public charities under Section 170(b)(1)(A)(i).3Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts The practical effect: the Section 4945 excise taxes on grant-making, and the requirement that private foundations get their scholarship procedures pre-approved by the IRS, do not apply to churches.4Internal Revenue Service. Taxes on Taxable Expenditures – Private Foundations
That’s flexibility, not a free pass. A separate part of the code still bites hard if the program benefits the wrong person.
The Line You Can’t Cross
Section 501(c)(3) prohibits any arrangement where the organization’s net earnings benefit a private individual. A program built to funnel money to the pastor’s family or a board member’s children isn’t advancing education in any public sense, and the IRS watches for exactly that pattern.
When a church provides a financial benefit to someone with substantial influence over its operations, and the benefit exceeds what’s reasonable, Section 4958 treats it as an excess benefit transaction. The penalties fall on the individuals, not on the church:
- 25 percent of the excess benefit, taxed to the recipient
- 10 percent taxed to any manager who knowingly approved it, capped at $20,000 per transaction
- 200 percent of the excess benefit if the recipient does not return the money within the allowed period
A “disqualified person” here includes anyone with substantial influence over the church during the five years before the transaction, and their family members.5Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions In cases of repeated abuse, the IRS can also revoke the church’s exempt status.
Picking Recipients the Right Way
The applicant pool must be broad enough to make up what the IRS calls a “charitable class.”6Internal Revenue Service. Private Foundations – Selection of Grantees on an Objective and Nondiscriminatory Basis Limiting the program to children of members of a large congregation can still meet that standard; opening it only to two or three families will not.
Selection criteria have to tie to the educational purpose of the grant. The IRS identifies past academic performance, aptitude test scores, instructor recommendations, financial need, and personal interview impressions as appropriate factors. Community service and alignment with the church’s mission are common additions. The point is that whatever the church picks, it applies the same yardstick to every applicant.
Who Sits on the Selection Committee
Selectors should not stand to gain from their own decisions. The IRS states plainly that people choosing recipients should not be in a position to receive a private benefit, directly or indirectly, from the choice. If a committee member’s child has applied, that member steps out of the room for that vote.
A written conflict of interest policy is worth putting in place before the first award. The IRS recommends that every exempt organization keep one, requiring affected individuals to disclose the conflict and recuse themselves from voting.7Internal Revenue Service. Form 1023 – Purpose of Conflict of Interest Policy Minutes should record who recused and why.
Documentation
Keep a complete file for every applicant, not just the ones who won. Application forms, transcripts, essays, recommendation letters, committee scorecards, and meeting notes together show that the church evaluated everyone the same way. The file does not need to be elaborate. It does need to exist.
When the Applicant Is a Pastor’s or Employee’s Family Member
This is where churches most often run into trouble. The IRS has spoken most directly about it in guidance on employer-related scholarship programs, and the principles carry over.
A scholarship must genuinely further the recipient’s education, not act as extra compensation for the employee. When the program is compensatory in nature, the IRS treats it as a private benefit that can threaten tax-exempt status. Employment can be an initial qualifier, but it cannot be the deciding factor.8Internal Revenue Service. Company Scholarship Programs
To let employees’ children apply safely, a church should do three things: put an independent committee in charge of the final decision, drive selection with non-employment factors like grades and financial need, and keep the share of awards going to employment-connected applicants small. If the senior pastor’s child wins every year, the pattern alone can invite scrutiny even when the process on paper looks fair.
How the Scholarship Is Taxed for the Student
Under Section 117, a scholarship is tax-free to the student when two conditions are met: the student is pursuing a degree at an eligible educational institution, and the money goes toward qualified education expenses. Qualified expenses are tuition, required fees, and books, supplies, and equipment required for coursework.9Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships
Money used for room and board, travel, or optional equipment is not tax-free. The IRS is explicit that those costs fall outside the qualified category.10Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education Any portion of the award that covers non-qualified expenses is taxable income to the student, even if the church intended it for general support.
The student reports the taxable portion on Schedule 1 of Form 1040, Line 8r (“Scholarship and fellowship grants not reported on Form W-2”), which flows to Line 8 of Form 1040. Because nothing is withheld from most scholarship disbursements, a student with a large taxable portion may need to make estimated tax payments during the year.11Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
What the Church Has to Report
Less than many church administrators assume. Churches are exempt from filing Form 990 under Section 6033(a)(3)(A)(i). And scholarship payments whose primary purpose is furthering the student’s education, rather than paying the student for services, generally do not require the church to issue a Form 1099. The reporting sits with the student.
Bookkeeping still matters. If the IRS ever questions the exempt status, clear records of how scholarship funds were collected, allocated, and distributed are the church’s best defense.
How to Pay Out the Money
Paying the school directly is the cleaner option. Sending the check to the financial aid or registrar’s office produces a paper trail showing the money went toward tuition and fees, which lines up with the tax-free treatment under Section 117 and removes any question about how the student spent it.
Direct payment to the student is still allowed. Section 117 does not require institutional payment. But it puts a heavier documentation burden on the church: get proof of enrollment and an itemized bill before writing the check, then collect receipts or a tuition statement afterward showing the funds were applied to qualified expenses.
Effect on the Student’s Federal Financial Aid
One point worth flagging for recipients before they accept: an outside scholarship can trigger a reduction elsewhere in their aid package. Federal rules prevent schools from awarding more aid than a student’s demonstrated need, so when a church scholarship pushes the total over that threshold, the financial aid office has to cut something.
Most schools cut loans or work-study first, which leaves the student better off because they borrow less. Roughly one in five schools cut institutional grants instead, which replaces one form of free money with another and leaves the student in the same place. Federal Pell Grants cannot be reduced by a school regardless of outside scholarship amounts. Recipients should call the school’s financial aid office before accepting the award so they know exactly how it will interact with what they already have.