Key takeaways
- Endowed scholarship funds perpetuate your giving into the future, making gifts based on investment income from your initial contribution.
- Scholarship endowments may be funded with cash and, in some cases, in-kind donations or tangible assets.
- Scholarship contributions — endowed or otherwise — may have positive implications for your annual taxes, but you’ll need to consult with a tax professional.
Most people assume that creating a lasting scholarship for college students is something only a multimillionaire would consider. But you can leave a lasting legacy for students without a huge sum of money by using an endowed scholarship.
An endowed scholarship is a donation that is invested by the college, the interest of which is used to fund scholarships each year. By endowing a scholarship, you can make a lasting difference by helping students reduce the amount of federal or private student loans they need.
What is an endowed scholarship?
An endowed scholarship begins with a donation made to a university, college or local foundation that earns interest each year. The organization will then invest the sum and use the investment interest to fund a scholarship for years to come. You can contribute more funds over time, but the principal amount will never be spent.
How to endow a scholarship
If you decide to endow a scholarship, contact the development office at your chosen university or college. They will then assign a representative to guide you through the process.
While the university manages the funds, you get to decide the scholarship details. To ensure a smooth and organized process, have the funding details and donation amount, the yearly donation limit, the scholarship name and eligibility requirements sorted out ahead of time. If you run into any roadblocks, the college’s development officer can assist you in finalizing the details.
Difference between scholarships and endowments
The primary difference between regular scholarships and endowments is the nature of how the donations are used by the college. Regular scholarships are often a one-time donation for a single award.
Endowments can fund scholarships for years and benefit multiple students, as the principal amount isn’t used by the college for the scholarship. The interest earned from your principal donation is instead used as the award money.
Who can endow scholarships?
Anyone with enough money to make the initial investment can endow a scholarship, and most schools have an endowment requirement between $25,000 and $50,000. However, due to the complexity, investment knowledge required and perpetual nature of this type of giving, it’s ideal to work in tandem with a college or university’s nonprofit foundation to get the ball rolling.
A single donor may come up with the funds necessary to establish an endowed scholarship fund, or a group — such as a family or civic organization — may set up a fundraiser to collect the minimum necessary to get started. Endowments are typically established with cash, although some schools accept appreciated securities, real estate or tangible personal property.
What to consider when endowing a scholarship
Endowing a scholarship can be a great way to make a lasting impact for students at your chosen institution. However, an endowment fund is a large financial responsibility, so it’s wise to draft a plan for your endowment before you commit.
What is your objective?
Whether you want to impact students in a specific field, assist faculty or fund research programs, it helps to determine your goals ahead of time. If you prefer that the university decide the best use for your scholarship, let the development officer guide you.
You may also be able to determine whether the scholarship is need-based or merit-based. For the latter, you can designate a scholarship for a particular major or request a minimum GPA. But keep in mind that while donors have a great deal of discretion in determining the criteria of a scholarship, they can’t name particular students to receive the scholarship.
Scholarships also cannot discriminate on the basis of ethnicity or gender. However, there are ways to direct the scholarship to a specific area if the donor is so inclined. For example, scholarships can be tailored to underrepresented students in specific fields of study, like women in STEM programs.
How much will you give and for how long?
The minimum amount of an endowed scholarship varies based on the university, as will the required number of years before it has to be fully funded. Once endowed, scholarships can be added to while you’re alive or through a will or trust after you die. Cash is the most common way to fund an endowment, although you may be able to make an in-kind gift.
The higher the endowment, the higher the amount that goes to students. A minimum scholarship endowment of $50,000 with a 4.7 percent return will yield nearly $2,500 per year. This could be distributed to one student or split between two.
Benefits of endowing a scholarship
As a general rule, if you make a cash gift while you’re alive, you can take a charitable deduction of up to 60 percent of your adjusted gross income (AGI) each year that you give. If your gift exceeds 60 percent of your AGI, you can roll over the difference to the following year for five years going forward.
If, however, your gift is in some form other than cash, the tax consequences are different. For example, if you gift stock, you might be able to deduct only 30 percent of your AGI.
For more information about your specific situation, it’s best to consult with a tax professional.
Bottom line
Endowed scholarships are a great way to make a difference at an institution you care about. If you’re interested in endowing funds, determine how much you can afford to give, what parameters you’d like to set for the scholarship and which universities you’re interested in contacting. Once you have a plan in place, reach out to the development office of your chosen university to learn more about the process.
Frequently asked questions
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