How SGOs disburse EFTC scholarship funds to schools and families

Collecting donations and issuing a §25F receipt is the easy half of running a Scholarship Granting Organization. The hard half is what happens after an award decision: moving real money out the door, to the right school or vendor, in a way that survives an audit. This is the companion to our 90/10 rule compliance guide (which covers separate accounts and anti-earmarking on the money-in side), income verification (which determines who is even eligible for a disbursement), and designating gifts to schools (which covers what a donor may direct before an award is ever made). Everything statutory below traces to IRC §25F.

How money actually moves

It helps to separate the two halves of an SGO’s job cleanly. Money-in is donor contributions arriving into the scholarship account, governed by the anti-earmarking rule and the 90/10 test. Money-out, the subject of this article, is what happens after a student has been found eligible (income-verified, under the 300% AMGI ceiling) and awarded a scholarship under the SGO’s criteria and the statutory renewal-then-sibling priority order.

Only after that award decision does a disbursement happen. The typical path: the SGO instructs its bank to move funds from the scholarship account to the student’s school (for tuition, fees, and other school charges) or to a vendor (for tutoring, special-needs services, books, supplies, computer equipment, or other items on the §530(b)(3)(A) qualified-expense list). The family and the school confirm enrollment or service delivery; the SGO logs the payment against that student’s award record. Treasury has said it will issue separate §530 guidance on exactly which expenses and schools qualify, calling it a high priority; that guidance is not out yet, so the statutory list is the boundary for now.

Operationally, most SGOs treat this as a recurring cycle rather than a one-time event: awards happen once, but disbursements often repeat per term as enrollment is reconfirmed. See the compliance calendar for how disbursement cycles fit alongside audits and reporting deadlines.

Why scholarship funds can’t touch operating accounts

This is the single most important control, and it is not optional. Section 25F(c)(5)(B) requires an SGO to maintain one or more separate accounts used exclusively for qualified contributions, specifically to prevent co-mingling. Fail it, and the organization risks failing the definition of a qualifying SGO altogether. Under Treasury’s October 2026 regulations, the IRS may remove a noncompliant SGO from the IRS SGO list (the SGO can appeal). Under the proposed rules, donors who gave while the SGO was on that list can generally rely on the listing for their credit, unless they knew the organization didn’t qualify or were responsible for or aware of the problem that got it removed, but the organization itself loses its standing to raise §25F money.

The proposed regulations give the account a name and a definition: the §25F segregated account. It may hold only qualified contributions and the earnings on them; every gift a donor designates as a §25F contribution must be deposited into it, whether or not the donor ends up claiming a credit; and the SGO must keep a complete set of books and records for it. A multistate SGO keeps a separate account for each covered state and pays a student only from the account for the state where that student lives (with narrow exceptions for military and tribal families).

Practically, that means payroll, rent, software subscriptions, and every other operating expense must run through a genuinely separate account from the one holding scholarship dollars, and disbursements to schools or vendors should be traceable as a direct line from the scholarship account outward. An SGO that pays a school from its general checking account, then reimburses itself later from the scholarship account, has created exactly the kind of commingling the statute is written to prevent, even if the numbers eventually net out to the same place. Set up the account structure before accepting a single dollar; see the 90/10 rule guide for the account-structure discussion in full, including the per-state segregated accounts Treasury’s proposed regulations require for multistate SGOs.

The record every disbursement needs

A disbursement without a paper trail is indistinguishable, to an auditor, from a disbursement that never should have happened. At minimum, each payment record should capture:

1. Which student was awarded the scholarship, tied back to the income-verification record that established eligibility (see income verification for SGOs).
2. Under what priority the award was made: a renewal, a sibling of a prior recipient, or a new applicant, per §25F(d)(1)(D).
3. The amount disbursed and the date.
4. The payee, school or vendor, and, where relevant, the invoice or enrollment confirmation the payment corresponds to.
5. The qualified-expense category the payment falls under, from the §530(b)(3)(A) list (tuition, fees, academic tutoring, special-needs services, books, supplies, computer equipment, and the other enumerated items).
6. The payment route: direct to the school, to a verified vendor, a qualified reimbursement to the family (with the receipt and the result of the duplicate check), or a qualified digital wallet.
7. Which account and which year’s money it came from: the §25F segregated account (for a multistate SGO, the state’s account), with payments applied to the oldest year’s income first, which is how the proposed rules order the 90% test.

Treasury’s October 2026 regulations lean on exactly this trail. Under the proposed rules, every SGO gets an annual financial and programmatic audit by a qualified independent third party (an outside professional or accredited body above $500,000 in total receipts; a committee of independent people unrelated to management at or below it). The audit must cover, among other things, the method(s) the SGO uses to track how scholarship money is paid (“whether by direct payment, through a qualified digital wallet, or by reimbursement”), how it sets award amounts, and verification that the expenses were qualified, tested at the level of the §25F segregated account. The SGO’s annual report to the IRS and its states adds aggregate spending by expense category, the highest, lowest, and average award, the number of schools recipients attended, and the amount and percentage of income spent. See our news read of the audit rule and the compliance calendar for the audit’s place in the annual cycle. An SGO that can only reconstruct its disbursement history after the fact, rather than producing it on demand, is not ready for that audit.

ACH versus check

Neither §25F nor Treasury’s proposed regulations specifies a payment rail. The rules govern who gets paid, covered in the next section, not how the money travels. Both ACH transfer and paper check are common in practice, and the choice is an operational one, not a compliance one:

• ACH is generally cheaper at volume, settles in a predictable window, and produces a machine-readable record that is easy to reconcile against an award ledger, useful once an SGO is disbursing to dozens or hundreds of schools per term.
• Check leaves a simple, familiar paper trail that smaller SGOs and smaller school business offices sometimes prefer, at the cost of slower settlement and manual reconciliation.

Whichever rail an SGO uses, the compliance requirement is the same: every transfer needs to be logged against a specific award before it leaves the scholarship account, not reconciled after the fact from bank statements alone.

Paying the school versus paying the family

Under Treasury’s proposed regulations, released October 1, 2026, this is now a rule rather than a habit. Proposed § 1.25F-3(c)(5) allows four payment routes:

1. School charges go directly to the school. Tuition, fees, room and board, and similar expenses charged by the school must be paid to the school, and the school must return anything paid in excess of the student’s costs or in error.
2. Other vendors can be paid directly if the SGO has verified the vendor as an appropriate provider, the vendor is not related, directly or indirectly, to the scholarship recipient, and the vendor is required to pay back any excess or mistaken payment.
3. Families can be paid only through a qualified reimbursement: the family provides a receipt showing both that it paid and that the expense qualifies, and before paying, the SGO runs its check that no other source has already covered the same expense.
4. A qualified digital wallet, defined as an electronic payment platform run by a third-party provider where families submit purchase requests, approved expenses are tracked, and payments are kept to qualified expenses by pre-approving vendors and paying them directly or by requiring timely receipts.

Behind all four sits a fraud rule: every SGO must keep “reasonable procedures for the prevention and detection of fraud and abuse,” including systems that catch two scholarships paying for the same expense for the same student when together they exceed its cost. Treasury also reminds SGOs that, as 501(c)(3) public charities, they may fund only expenses “reasonably necessary to further the organization’s charitable exempt purposes,” so an extravagant purchase that happens to fit a §530 category can still be a problem. The statute itself only says funds must go to §530(b)(3)(A) qualified expenses; the payment rules are how the proposed regulations make that verifiable, and SGOs may rely on them for contributions made on or after January 1, 2027. Our news read of the four payment routes quotes the rule text.

Paying the institution or vendor directly also keeps the proof simple, since the payment record and the expense category line up automatically. Handing a family unreceipted cash to spend at its discretion is not an allowed route under the proposed rules.

When money comes back

At any volume, some payments will turn out to be too large or sent in error. The proposed rules require schools, and vendors paid directly, to return excess or mistaken payments, and they settle how the refund is counted. A returned payment is treated as new income in the year it comes back, and the SGO has until the end of the following taxable year to spend 90% of it on scholarships. A payment can never count as spent in more than one year, so the original payment and the refund have to be tracked as separate entries.

Note too that the scholarship is awarded to the student, never routed to a school as such. A school receives money because a family the SGO already found eligible and already awarded chose to enroll there, which is also why §25F(d)(1)(A) requires an SGO to serve 10 or more students who do not all attend the same school: an SGO exists to fund students, not to bankroll one institution.

Controls that keep disbursement audit-clean

A handful of internal controls, mostly operational practice built on top of the statute rather than requirements stated in the statute itself, are what separate an SGO whose disbursement history holds up under audit from one that doesn’t:

• Segregate award authority from payment authority. The person or committee deciding who gets a scholarship shouldn’t also be the sole person able to release funds, a basic separation of duties that keeps a self-dealing problem from becoming a disbursement problem. Under Treasury’s proposed regulations, anyone who takes part in selecting recipients or setting award amounts, committee members and unpaid volunteers included, is a disqualified person, and so is their family, so none of them can receive a scholarship (see the disqualified-persons rules and the 90/10 rule guide).
• Run the duplicate-award check before every payment. This one is a rule, not just good practice: the proposed regulations require systems to prevent and detect two scholarships paying for the same expense for the same student beyond its cost, and a family reimbursement may go out only after that check.
• Confirm enrollment before, or as a condition of, each payment. A scholarship awarded in spring can be moot by fall if a family’s plans change; per-term disbursement tied to enrollment confirmation avoids paying out for a student who never attended.
• Reconcile the disbursement ledger against the scholarship account monthly, not just at audit time, so a discrepancy surfaces while it’s still explainable.
• Keep a written disbursement policy covering payment rail, timing, which of the four payment routes the SGO uses, how vendors are verified and checked for a relationship to the family, the receipt standard for reimbursements, what happens if a school can’t or won’t accept a payment, and how returned payments are booked. If the SGO lets donors express a school preference, the policy should also say what happens when that school’s eligible pool can’t absorb the money (see designating gifts to schools).
• Put the return-of-excess term in writing with each participating school and directly paid vendor. The proposed rules make the school’s duty to return excess or mistaken payments a condition of the payment route, so an agreement that says so is the simplest evidence for the auditor.

Timing: when funds actually go out

Neither §25F nor the proposed regulations sets a per-student disbursement deadline. What the statute does set is the 90% spending requirement (§25F(d)(1)(B)), a program-wide ratio rather than a per-student clock, and Treasury’s proposed regulations now say how it is timed and counted:

• The deadline. 90% of a year’s income must be spent on scholarships by the last day of the following taxable year. A first-year SGO has until the end of its second year. “Income” means all of the organization’s gross receipts, or, for an SGO using the 85% safe harbor (and for every multistate SGO, per state), the qualified contributions and earnings in its §25F segregated account.
• Spent means paid. Amounts count when paid under the cash method. An award that has been approved but not paid counts for nothing yet.
• Multi-year awards count in each year a payment actually goes out, never up front. Treasury’s preamble ties this to the statute’s annual approach, describing household income, family size, and in-state residence as determined “as of the time when the scholarship is paid.”
• Oldest money first. Payments are treated as coming from the earliest year’s income first, then later years in order, and no payment counts in more than one year.
• Digital wallets. Treasury’s preamble says money transferred to a third party for disbursement through a qualified digital wallet counts as spent on the date of transfer, as long as the SGO does not keep ownership of the funds.
• Refunds restart the clock for those dollars: a returned overpayment is new income in the year it comes back.

Sitting on awarded-but-unpaid funds therefore does nothing for the test. Most SGOs disburse on a school-term schedule (per semester or per academic year) both to match how schools bill tuition and to keep their own books clean heading into the annual audit; the two-year window gives room to do that without rushing. More detail is in our news read of the 90% timing rule.

If starting an SGO from scratch, disbursement timing is one of the operational decisions worth locking down early, alongside account structure and award criteria; see how to start an SGO for the full setup sequence.

What’s statute versus what’s practice

It’s worth being explicit about where the lines fall, because they get blurred constantly in how-to guidance:

• Statutory (§25F itself): separate accounts (§25F(c)(5)(B)); no earmarking for a particular student (§25F(d)(1)(E)); the 90% spending requirement (§25F(d)(1)(B)); the renewal-then-sibling priority order (§25F(d)(1)(D)); funds limited to §530(b)(3)(A) qualified expenses; no disbursement to a disqualified person (§25F(d)(2)); 10-or-more students at more than one school (§25F(d)(1)(A)).
• Regulatory (Treasury’s October 2026 regulations): the IRS SGO portal, donor acknowledgments by January 31, and IRS contribution reporting by February 28 (temporary regulations, which take effect without a comment period and apply from September 1, 2026); the §25F segregated account rules, the annual financial and programmatic audit, the four payment routes, duplicate-award prevention, the treatment of refunds, and the 90% timing and spent-when-paid rules (proposed regulations, which SGOs may rely on for 2027 contributions but which are not final; comments are due December 1, 2026).
• Still open: Treasury’s separate §530 guidance on exactly which expenses and schools qualify, and the final regulations themselves.
• Operational practice, not required by §25F at all: ACH versus check, per-term versus lump-sum timing, and most of the internal controls above. These are how well-run SGOs demonstrate compliance with the statutory and regulatory requirements, not requirements in their own right.

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