Scholarship funds are used to track the flow of scholarship (not income) through the system.
You can start a fund with an amount money that will not appear on the income statement or using a donation or scholarship activity, which will appear on the income statement.
Money from scholarship funds can be used to make payments in the system, and the transactions will appear on the Scholarship Not Income Report or the Scholarship Funds Report.
Here is a video walkthrough of the process to set up Scholarship Funds.