What Can Section 25F SGO Scholarships Pay For? A Guide to Qualified Expenses

One of the practical questions that SGOs face early in their operational planning is: exactly what can scholarships pay for? The answer comes from an unlikely source — the Coverdell Education Savings Account rules under Section 530(b)(4) of the Internal Revenue Code, which Section 25F incorporates by reference to define qualified educational expenses.

Understanding the Coverdell expense categories, and how they apply in the Section 25F context, is essential for designing your scholarship program and for advising applicant families on what expenses are eligible for awards.

The Coverdell Framework

Section 530(b)(4) of the Internal Revenue Code defines qualified education expenses for Coverdell purposes as:

• Tuition, fees, books, supplies, and equipment required for enrollment or attendance
• Academic tutoring
• Special needs services for a beneficiary with special needs
• Room and board (subject to limits) for full-time students
• Uniforms required by the school
• Transportation costs to and from the school
• Computer technology, equipment, or internet access and related services (if used by the student primarily for educational purposes)
• Supplementary educational items

For Section 25F purposes, these categories apply to elementary and secondary education (K-12) rather than to higher education. The expenses must be incurred in connection with the student's attendance at an eligible school.

What Clearly Qualifies

Tuition and required fees. The core scholarship use case — paying for tuition and fees required for enrollment at a private K-12 school. This is unambiguous.

Required textbooks, supplies, and equipment. Books and supplies that the school requires for coursework are qualified expenses. The "required" standard matters — books that the student chooses to buy but that are not required by the school are more questionable.

Academic tutoring. Tutoring services provided by a qualified tutor to supplement classroom instruction are qualified expenses. The tutoring should be academic in nature — subject-matter instruction that directly supports the student's education.

Uniforms. If the school requires uniforms, the cost of those uniforms is a qualified expense. Schools that have dress codes but do not require specific uniform items create more ambiguity.

Computer equipment and internet access. A computer or tablet purchased primarily for educational use, and internet access used primarily for educational purposes, are qualified expenses. The "primarily for educational purposes" standard requires judgment — a family that purchases a gaming-focused PC and calls it a school computer is testing the boundary of this provision.

Special education services. For students with identified special needs, services designed to address those needs in an educational context are qualified expenses. Documentation of the need and the service's educational connection is important.

What Does Not Qualify

Non-required enrichment activities. Extracurricular activities that are not part of the school's curriculum — a sports league, a private music studio, summer camp — are not qualified expenses even if they are educational in a broad sense. The expense must be connected to the student's attendance at an eligible school.

Medical expenses. Healthcare costs, even those incurred by a student in connection with school attendance (a required physical for sports, for example), are not qualified education expenses under the Coverdell framework.

After-school care. Childcare and after-school supervision programs that are not academic in nature are not qualified expenses, even if they are provided by the school.

College preparatory expenses not connected to K-12 enrollment. SAT prep courses, college application fees, and similar expenses oriented toward post-secondary education are not qualified K-12 expenses under Section 25F.

The Gray Areas

Several categories of expenses present genuine uncertainty, and IRS guidance on Section 25F may eventually address them.

Transportation. The Coverdell framework includes transportation costs to and from school as qualified expenses. In practice, this means school bus fees and similar transportation costs required for the student to attend school. Whether it extends to private car transportation costs (fuel, mileage) or to transportation associated with educational activities away from the main campus is less clear.

Educational technology that serves multiple purposes. A laptop that a student uses for schoolwork and personal entertainment is a common fact pattern. The "primarily for educational purposes" standard creates a judgment call that is fact-specific. Documentation of how the device is used in the school's curriculum strengthens the position that it is a qualified expense.

Programs with mixed educational and religious content. For faith-based schools that integrate religious instruction into their academic curriculum, the religious components of an otherwise academic program are not clearly excluded by the Coverdell framework. The statute does not contain an explicit exclusion for faith-based educational content. However, this area is likely to receive regulatory attention, and SGOs serving faith-based school communities should monitor IRS guidance closely.

Educational programs outside the traditional classroom. Home-based schooling programs, virtual schools, and non-traditional educational models create questions about which expenses are "required for enrollment or attendance." A home-schooled student enrolled in a formal curriculum program has a clearer claim to qualified expenses than a student in a loosely organized home-education arrangement.

How SGOs Should Manage Qualified Expenses

The practical implication of these rules is that SGOs should not simply write checks to families or students and leave expense categorization to them. A scholarship awarded "for education" without more specific guidance creates the risk that families use the funds for non-qualified purposes, which puts the scholarship's compliance status at risk.

Design your award as reimbursement or direct payment. Rather than distributing scholarship funds to families, consider paying qualifying institutions and vendors directly. A check written to the school for tuition is unambiguously a qualified expense. A check written to a family with an instruction to use it for qualified expenses is harder to verify.

Provide families with a qualified expense list. As part of your scholarship award documentation, give families a clear explanation of what expenses qualify and what does not. When families understand the rules, they are more likely to use funds appropriately.

Require receipts for reimbursement awards. If your program uses a reimbursement model — families pay first, then submit receipts — require that receipts accompany reimbursement requests and that the expenses on the receipts are clearly categorized.

Document your expense categorization methodology. Where you make judgment calls on borderline expenses — transportation, mixed-use technology, partially-religious programming — document the rationale. If IRS guidance later clarifies those categories, your documentation demonstrates that you were applying a reasonable methodology in the interim.

The qualified expense rules under Section 25F are intended to ensure that scholarship funds reach students in educationally meaningful ways. An SGO that manages its expense categories carefully protects its compliance record and ensures that its scholarship awards genuinely serve the educational purposes the statute is designed to advance.