A former owner of the Washington Post recently announced the creation of the nation’s largest scholarship fund to assist students who entered the United States illegally as children. The $25 million fund has a goal of awarding full-time scholarships to 1,000 students in the next academic year. Donald E. Graham took note of the fact that students who entered the U.S. as children (generally with no say in the matter) find themselves in a difficult situation, where they have grown up as Americans—but because they aren’t citizens or legal residents, they don’t have access to federal loans, Pell grants and other educational benefits.

Private foundations and other grantmakers long have been interested in providing funding that can fill that gap and allow motivated students to attend college—but there are legal issues and uncertainties that have precluded many from doing so. However, several recent legal developments have made many foundations more comfortable with granting such scholarships, and we may see even more similar funds spring up.

Deferred Action for Childhood Arrivals (“DACA”). Announced by the Obama administration in June 2012, DACA is a decision to defer removal action for certain people as an act of prosecutorial discretion. Individuals who meet the DACA requirements are not considered to be unlawfully present in the United States while the deferred action is in effect, and may be eligible for employment authorization. To qualify, individuals must demonstrate that they:

• Were under the age of 31 as of June 15, 2012;
• Came to the United States before their 16th birthday;
• Have continuously resided in the United States since June 15, 2007, up to the present time;
• Were physically present in the United States on June 15, 2012, and at the time of request for consideration of deferred action;
• Entered without inspection before June 15, 2012, or had lawful status that expired as of June 15, 2012;
• Are currently in school, have graduated from high school, completed a GED, or are an honorably discharged veteran; and
• Have not been convicted of a felony, significant misdemeanor, three or more other misdemeanors, and do not otherwise pose a threat to national security or public safety.

Colorado In-State Classification. Colorado, like several other states, has taken the step of providing in-state tuition to certain undocumented students who meet certain requirements. Under SB 13-033, which was signed into law by the governor in April 2013, students qualify for in-state tuition if  they:

• Attended  a Colorado school for three years immediately preceding their graduation (or obtaining a GED);
• Attend a higher-education institution within a year of graduation (or for some students who don’t attend college within a year,  establish that they have physically present in Colorado continuously for 18 months before then enrolling; and
• Submit an affidavit to the institution to which they are submitted, stating that they have applied for lawful presence or will apply as soon as they are eligible to do so.

Putting It All Together. A program like DACA provides some comfort for grantmakers that have had concerns that providing scholarships or other aid to undocumented students could be considered aiding in the violation of U.S. immigration law (though some would argue that DACA is not as clear-cut on this point as something like the DREAM Act, which would provide a path to permanent legal status rather than just a period of lawful presence).
However, there are still some taxation implications that are related to students’ immigration status—chief of which is the potential reporting (and withholding of taxes) on scholarship amounts. Organizations will need to wrangle with whether the scholarships are taxable  to the student, and if there are any related reporting and withholding obligations.

It is possible for scholarships to be non-taxable in their entirety—and as a result not reportable—if the funds are used entirely for qualified tuition and related expenses (e.g., tuition and required fees) at an educational institution where the student is a degree candidate. However, if a portion of the scholarship is taxable (which will be the case if some of the funds are used for room and board, for example, or if the scholarship requires services to be performed), the organization will need to consider carefully its obligations under the federal tax law. Scholarships involving  foreign students involve more complicated rules, and the rub is that undocumented students aren’t always considered U.S. persons under tax law—which means the onus is on the organization to figure out the best way to comply.

One option, of course, is to structure a scholarships to be entirely non-taxable (i.e., by meeting the requirements discussed above). If that isn’t feasible, the organization can consider using the substantial presence test under the tax law, which is a way of getting undocumented students under the definition of U.S. person for tax purposes (not for immigration purposes, however).  The substantial presence test requires an individual to be physically present in the U.S. on at least:

• 31 days during the current year, and
• 183 days during the 3-year period including the current year and prior two years, counting (i) all days present in current year; (ii) one-third of the days present in the first prior year; and one-sixth of the days present in the second prior year.

Student that meet the requirements for Colorado in-state status would potentially meet this test, as well.

Another option is to conduct backup withholding on the students’ scholarship funds, as it would for some foreign scholarship recipients, but this is not generally an attractive option from either party’s perspective.

Bottom Line. Large organizations such as the Bill and Melinda Gates Foundation have been making grants to efforts to support scholarships to undocumented students, and the creation of the new, massive fund by Graham could be an indication that this issue is gaining even more ground. As the Washington Post article indicates, education of these students is something that often gets bi-partisan support—even when other immigration issues are stickier. But organizations should take care and remember there are still some legal issues to maneuver.