You don’t need to major in finance to understand the enormity of paying for a college education. And you don’t need a degree in psychology to realize that creating an educational scholarship could have an enormous impact on someone’s life.
Philanthropists seeking ways to make a direct, measurable impact are increasingly turning to education as an avenue for charitable giving — especially helping people pay for college. College costs continue to rise, and they can become a considerable financial burden for students.
“Individuals with high net worth understand the importance of higher education,” says Bill Dolan, vice president and senior philanthropic advisor at U.S. Bank’s Charitable Services Group. “A lot of them have seen the benefits. They’ve been promoted through the ranks or they’ve started businesses, and they want to pass on those benefits to others with a similar background or future generations from their hometown.”
Designed to be permanent and perpetual, a scholarship endowment may be established in the donor’s name or in the name of friends or family. Funds are invested in a diversified portfolio, and scholarships are awarded to individual students each academic year.
Endowing scholarships is generally done through a private foundation. Each year, all funds must pay out a minimum of 5 percent, which is an amount that can be budgeted for scholarships. The minimum size for a private foundation is typically $2 million to $3 million.
If working directly with a college or university, donors can fund scholarship endowments at smaller amounts. Also, donors can specify in their will or trust documents that they want to leave a portion of their estate to the endowment.
Donors often designate specific criteria for applicants to be eligible for the scholarship. The criteria typically fall into one of three common categories: academic achievement, financial need or community service.
High school students graduating at the top of the class will likely have access to scholarship funds through a college or university, and students from the poorest families may have access to financial aid. But students who have good but not excellent grades and who come from working-class or middle-class families often need the most help paying for college.
“Not everyone can be an ‘A’ student, and there are plenty of successful entrepreneurs who didn’t make the grade in high school,” Dolan says. “They might be eager to do something to help students who, like them, may not qualify for a lot of other scholarships or have other avenues to pay for college.”
Supporting the educational aspirations of young scholars not only makes a donor feel good, there can be significant tax benefits associated with establishing an endowed scholarship.
Cash donations are eligible for a 50 percent deduction from an individual’s adjusted gross income in the year the contribution is made. If the person is donating appreciated securities, the income tax deduction is 30 percent.
For many donors, the greatest benefit comes from providing crucial opportunities to students. Some meet with the scholarship recipients each year and follow their careers, building lasting relationships.
“An 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,’” Dolan says. “Establishing a scholarship can help you change families’ lives, one student at a time.”
Learn how we can work with your tax and legal advisors to help you create a scholarship endowment today.