Across the charitable sector, many view access to a quality education as the foundation for a more equitable society. And donating money for scholarships can be an incredibly effective way to further this mission. The National Scholarship Providers Association reports that its members awarded nearly $5.9 billion in 2020–2021.1 And scholarships and grants covered more than one quarter of college costs for families that academic year—making them the second-largest source of funding after parent income and savings, according to a survey by Sallie Mae.2
But a well-designed scholarship program requires thoughtful upfront planning to ensure its success. When deciding how to start a scholarship fund, donors must make several important decisions regarding both the scope and criteria for choosing recipients. And, they’ll need to be particularly strategic if using a charitable vehicle such as a donor-advised fund (DAF) or private foundation to carry out their mission. Here’s how you can ensure your scholarship program maximizes impact when it comes to the economics of education.
Fund Your Program with Finesse
Contributions to a scholarship program may be tax deductible if the pool of eligible recipients constitutes a sufficiently broad “charitable class” as defined by the IRS. That means donors can’t earmark funds for specific individuals. When exploring what’s covered, scholarships have freer rein. Grants may pay for tuition, fees, books, and other required supplies. Some have even broader mandates, extending to travel expenses, tutoring or academic support services, and community service related to the recipient’s field of study.
Before donating money for scholarships, consider the following:
- Will you support students attending a specific academic institution? Or focus on a certain demographic instead? Donors may target a specific high school or college—such as their alma mater. But when doing so, first reach out to the development office to discuss intent. Alternatively, donors may support a local or national nonprofit organization that promotes education within a specific community or population.
- Will you contribute to an existing scholarship program, or create a new one? If starting from scratch, what will the criteria be for grant recipients? Scholarship grants may benefit a wide range of individuals. Some donors prefer to make them need-based, while others target specific marginalized groups or encourage study within a particular sector (such as nursing or STEM). Also consider whether grant recipients will undergo only initial screening or adhere to ongoing requirements such as GPA thresholds to maintain funding.
- How involved would you like to be on an ongoing basis? Will you participate in the screening and/or selection process to select recipients? The level of control that an individual (or family) wishes to have may determine the funding method (as discussed below). Time is also a consideration for many donors. Do you have the wherewithal to pore over dozens of potential applications? According to a report by Fastweb, a leading scholarship search platform, the average number of applications per scholarship is around 50–100.3
- What time horizon do you have in mind? What annual cost do you hope to offset through scholarship grants? The answers to these questions will guide both funding requirements and investment allocation decisions for the program. Consider the following display, which quantifies the lump sum amount that a donor would need to contribute to a program to maintain varying levels of scholarship awards over a 10, 15, or 20-year time horizon:
Here we assume that funds are invested in a tax-exempt portfolio of 60% global equities and 40% bonds, and that we adjust the cost of each annual award for inflation each year. We also strive for a very high (90%) level of confidence that the donor’s initial contribution will sustain the program over the desired time horizon.
Of course, a lump sum contribution (and corresponding charitable income tax deduction) may or may not be the most tax-efficient strategy for every donor. A large, one-time contribution can be an impactful way to offset taxable income in a high-earning year. Alternatively, a donor may elect to make a multiyear commitment and stage funding over time.
Scholarship Funding 101
Donors wondering how to start a scholarship fund must also carefully consider the funding method they’ll use to sponsor the program. Here, there are several options. Donors can make payments directly to the educational institution, either in a lump sum (if the school is set up to invest the funds alongside their endowment) or by committing to ongoing funding as the program distributes awards.
Alternatively, many donors choose to fund scholarship programs through their DAFs or private foundations. But keep in mind, leveraging these vehicles carries certain restrictions—and control plays a key role. When funding through a DAF, neither the donor nor their family members can have a deciding vote over the scholarship recipients. They may participate in the interview and screening process, but involvement will be limited.
On the other hand, a private foundation may offer more flexibility in selecting the recipients, but at the cost of increased administration. If the donors will be directing the choice of recipients, then pre-approval from the IRS will likely be required prior to launch. The IRS will be looking for elements such as:
- An objective screening process
- A sufficiently broad charitable class of potential recipients
- Systems in place to monitor the use of funds following disbursement
For these reasons, donors exploring how to start a scholarship fund should carefully weigh the salience of control when determining how to fund a given program.
Take Action: Where to Begin
When donating money for scholarships at a specific academic institution, start with the school’s development office to understand their capabilities for accepting and administering the program. Beyond this step, carefully consider the above questions prior to moving forward. A scholarship award can transform the recipient’s life and having a strategic plan up front can help to ensure that a program will benefit students for many years to come.
- Shea McCabe, CFP®
- Associate Director—Wealth Strategies
3 Fastweb (2021). Scholarship Statistics: Data and Trends.