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) or to a vendor (for tutoring, curriculum, therapies, 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.

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, which would mean donors never received a valid credit for their gifts in the first place.

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 Treasury’s previewed per-state segregated-account safe harbor 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, tutoring, curriculum, fees, and the other enumerated items).

This is exactly the trail Treasury’s June 2026 preview of the proposed §25F regulations anticipates SGOs needing: a unique-donor-number reporting system on the money-in side, and an annual independent audit (financial and programmatic) covering the organization as a whole, including how scholarship dollars were actually spent. See 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

Nothing in §25F specifies a payment rail. 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

Most SGOs pay the school directly for tuition, and pay a vendor directly (or reimburse the family against a receipt) for other qualified expenses, rather than depositing scholarship cash with the family to spend at their discretion. This is common, prudent practice, again not a §25F mandate: the statute requires that funds be spent on §530(b)(3)(A) qualified expenses, but it does not specify who the check must be written to.

Paying the institution or vendor directly is simply the easiest way for an SGO to demonstrate that the qualified-expense requirement was met, since the payment record and the expense category line up automatically. An SGO that hands cash to a family and trusts them to spend it correctly has taken on more work proving compliance later, not less.

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 (see the self-dealing and disqualified-persons rule in the 90/10 rule guide).
• 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, what happens if a school can’t or won’t accept a payment, and what happens to a designated gift (see designating gifts to schools) if the designated school’s eligible pool can’t absorb it.

Timing: when funds actually go out

§25F sets no disbursement deadline. What it does set is the 90% spending requirement (§25F(d)(1)(B)), measured against the organization’s income for the relevant period, which is a program-wide ratio, not a per-student clock. An SGO could, in principle, sit on awarded-but-undisbursed funds and still be working toward compliance, though in practice 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.

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 line falls, because the two 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, previewed but not yet final: the annual independent audit and unique-donor-number reporting system, per Treasury’s June 2026 guidance preview, expected in proposed regulations by the end of September 2026.
• Operational practice, not required by §25F at all: ACH versus check, paying the school directly versus reimbursing the family, per-term versus lump-sum timing, and 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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