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Nonprofit Law/Non-Profit giving Interest Free Loans


We have started a non-profit organization that gives interest free student loans to either help pay for college or to pay off current student loans to avoid having the student pay interest. Since we are an entity giving no interest loans are we subject to the imputed interest laws with a limit of $100k? Most of what I've read has to do with intra-family loans. We are unique in that we are a non-profit and giving interest free loans. Are there any tax implications that we need to be aware of?

There are no federal U.S. laws that require imputed interest in loans from 501(c)(3)
organization's to beneficiary's when the organization follows the IRS regulations for scholarship grants (which includes no interest loans).

The IRS has recognized an organization making low-interest, unsecured loans for educational purposes to students needing financial assistance as exempt under IRC 501(c)(3) in Rev. Rul. 63-220, 1963-2 C.B. 208.

You need advance approval from the IRS for your method of giving
scholarships if you want assurance that your procedure is not going
to be called illegal by the IRS.

For organizations granting scholarships,  Schedule H of the IRS
Exemption Application needs to be completed and evidence needed as
starting at the bottom of page 25 of Publication 557 at
and you can see there the issues that the IRS is concerned with.

See the Application for Exemption on pdf page 28 for that
Schedule H.

A scholarship or fellowship is tax free to the recipient only if he
or she is:
A candidate for a degree at an eligible educational institution;
Uses the scholarship or fellowship to pay qualified education
Qualified education expenses include tuition and fees; and course-
related expenses such as books, supplies, and equipment. Room and
board, travel, research, clerical help, and non-required equipment
are not qualified education expenses... you must include in income any part of the scholarship or fellowship that represents payments for services.

Harvey Mechanic, Attorney at Law -

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic


I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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