“A society grows great when old men plant trees in whose shade they may never sit.”
We live in a time where both the costs and benefits of education have never been greater. The societal benefits of higher education investment include a more productive workforce, reduced crime, and a more engaged citizenry. Unfortunately, many people are either foregoing education or amassing crippling debt to pursue it. Private investment in scholarships is a great way to meet this need. Specifically, starting an endowed scholarship will provide sustainable education funding, receive beneficial tax benefits, and establish a legacy.
What is an Endowed Scholarship?
There are two options to consider when starting a scholarship: a traditional scholarship or an endowed scholarship. A traditional scholarship is a direct transfer, usually of cash, to a student or students for the purpose of obtaining higher education. This is very effective, but once the money is spent, it’s gone; if you want to pay education expenses for more students next year, you’d need to donate more money.
Alternatively, an endowed scholarship provides financial assistance on an ongoing basis through just one donation. For an endowed scholarship, the donor makes a large one-time contribution to a university or private foundation. The recipient organization then invests the donation and uses the interest from the investment to fund scholarships on an ongoing basis.
How Do I Start an Endowed Scholarship?
It takes a sizeable contribution to start an endowed scholarship – the exact amount varies depending on the school or institution you’re working with, but in general a minimum of $25,000-$50,000 is required.
It’s then up to the donor to determine the details of the scholarship. The first decision being what it should be called. Many endowed scholarships are created in the memory of someone, in which case it makes sense to name it after them. Alternatively, if the scholarship was endowed to promote a cause or study into a certain topic or area, it should be named to reflect that. It can also take a family name or some other legacy-building moniker.
The criteria for receiving the scholarship are another crucial decision to be made by the donor. Criteria normally fall into three categories: academic, financial need, or community service. It can be further targeted by the students’ backgrounds and/or experiences, or the specific field or major the student(s) are pursuing.
Finally, the annual scholarship total provided and the number of students who receive it need to be determined. There are financial constraints to this – depending on the size of the endowment and the allocation of the investments, withdrawals above a given amount could threaten the long-term sustainability of the scholarship. Given those limits, the total and per-student funding must be decided by the donor.
Tax Benefits of Funding a Scholarship
In addition to providing educational opportunities for students, endowing a scholarship provides beneficial tax planning opportunities.
A scholarship is considered a charitable donation if the fund it goes into is tax-exempt. The tax deduction you can realize from establishing your scholarship depends on your income and tax bracket. As a general rule, you can take a charitable deduction of up to 60% of your adjusted gross income (AGI) each year that you give. If your gift exceeds 60% 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, real estate, or some other in-kind donation, you might be able to deduct only 30 percent of your AGI.
Scholarships can also be established through your estate plan. Our Wealth Advisors can help you with any specific questions you may have regarding this.
According to Bill Dolan, senior philanthropic advisor U.S. Bank, “[a]n overwhelming number of letters we receive from people who have received scholarships and want to thank the original donors say, ‘No one in my family has gone to college; I am the first one. Establishing a scholarship can help you change families’ lives, one student at a time.”
Endowed scholarships are a great way to fund educational opportunities for people who would have otherwise been unable to achieve them, realize a tax benefit, and build a legacy for a friend or mission you care about.