Beyond Audit-Ready: Strategic Insights for Scholarship Programs in Crisis
The scholarship landscape has shifted dramatically in recent months. While we've previously discussed the technical aspects of getting audit-ready, our recent webinar "Navigating Philanthropy's Scholarship Crisis" (watch the replay here) revealed deeper strategic insights that every scholarship-providing organization needs to understand right now.
The Perfect Storm: Why This Moment is Different
Right now, students and philanthropic organizations are facing simultaneous crises. The convergence of several factors creates an unprecedented challenge:
Potential elimination of the Department of Education
Targeting of DEI-related scholarship criteria
Possible disappearance of federal financial aid programs
Large scholarship programs already being forced to change
Philanthropy itself being named as a target for review and sanctions
This isn't just about compliance anymore—it's about survival and strategic positioning for the future.
The Crisis Response: Two Paths Forward
Organizations essentially have two choices:
Path 1: Look Away and Hope Continue business as usual and hope auditors don't look under the rug. This path is easier in the short term but invites significant risk.
Path 2: Lean In Strategically Take intentional action to understand what your scholarships do, how you're conducting activities, and define why you offer them at all. This requires more work upfront but offers long-term security and reward.
The key insight from our webinar: "A donor told me to" is no longer sufficient justification for scholarship program decisions.
Understanding Your Historical Context
Many scholarship programs exist today due to the Pension Protection Act of 2006 (PPA), which made “scholarship” a fund type and added numerous rules. Many organizations implemented these changes through different methods that evolved over time, often making only forward-facing changes without addressing underlying structural issues.
Critical Questions to Ask:
When did your organization start offering scholarships?
Did you do it by choice, or due to PPA requirements?
When did you establish program guidelines, and when were they last updated?
Do you know the full history of how your current processes came to be?
The Governance Reality Check
Beyond basic audit-readiness, organizations need to understand the deeper governance requirements that many overlook:
The Broad Charitable Class Requirement: Your scholarships must be open to "an indefinite number of individuals who may benefit"—not just a large group, but truly broad and indefinite.
The Independence Requirement: Even for memorial and corporate/employer funds, there can be no donor control of the selection committee. This is often misunderstood and improperly implemented.
The Documentation Standard: Every step of your process—from initial donor conversations through final selections—should be documented in ways that can withstand scrutiny years later.
Special Cases: When Standard Rules Get Complex
Some scholarship types require additional considerations. For instance, employer-related scholarships operate under specific IRS guidance (Rev. Proc. 76-47) with requirements like maintaining "sufficiently broad" eligibility groups and ensuring selection committees remain completely independent from the employer. These examples illustrate how certain scholarship categories demand deeper understanding of specialized compliance requirements.
The Student Crisis Context
While you're managing compliance challenges, remember why this work matters more than ever. Today's students are facing:
Uncertainty about FAFSA functionality
Questions about Pell Grant and work-study program continuity
Institutional instability and program eliminations
International student status concerns
Basic needs (food, housing) insecurity (59% of students in 2024)
With average Costs of Attendance ranging from $19,860 to $60,420 and maximum Pell Grants worth only $7,395, the financial gap is enormous. Your scholarship program has a critical role to play.
Strategic Recommendations for Moving Forward
1. Document Your "Why": Go beyond compliance to articulate why scholarships matter to your mission and community. This becomes your North Star for all decision-making.
2. Identify Your “Yellow Flags” Early: Proactively identify criteria or practices that might attract scrutiny. Address these before external pressure forces hasty decisions.
3. Engage Stakeholders Transparently: Early, honest conversations with donors about potential changes build stronger relationships and shared understanding of evolving requirements.
4. Invest in Staff Knowledge: Ensure your team understands not just what to do, but why these requirements exist and how to navigate complex situations.
5. Plan for Flexibility: Build systems that can adapt to changing requirements without losing sight of your core purpose and impact goals.
The Choice is Yours
This crisis moment offers an unprecedented opportunity to strengthen your scholarship program's foundation. Organizations that act strategically now will be better positioned not just for potential audits, but for creating meaningful impact in an uncertain landscape.
The question isn't whether change is coming—it's whether you'll be ready for it.
Students First Consulting's Audit-Ready Toolkit provides the comprehensive resources organizations need to navigate this challenging landscape. From purpose definition worksheets to stakeholder engagement templates, we've created everything you need to turn this crisis into an opportunity for stronger, more impactful scholarship programs.
Does your organization need a deeper dive? Schedule a free 30-minute consultation with our team to discuss your specific situation and get personalized guidance on strengthening your program’s compliance and impact.
