Creating a Lasting Legacy: How to Start an Endowed Scholarship

College tuition continues to rise each year, making higher education increasingly unaffordable. Now more than ever, many students desperately need scholarships and financial aid to achieve their academic dreams without being burdened by a lifetime of student-loan debt. If you want to make a lasting impact by helping students pay for college, an endowed scholarship is a powerful option to consider.

What is an Endowed Scholarship?

An endowed scholarship is a fund that is set up to provide financial aid to students in perpetuity. A scholarship endowment is a financial fund established by donors or institutions to support educational scholarships in perpetuity. The principal amount remains intact, while the interest generated provides recurring funding for scholarships. Endowments are gifts held in perpetuity and invested in a manner that protects the principal from inflation. The investment income provides a stable funding source for such purposes as scholarships, professorships, lecture series, and research centers.

How an Endowment Fund Works

When you make a donation to start an endowed scholarship, the funds are invested by the university. Each year, a portion of the interest earned on the investment is used to fund scholarships for deserving students. The remaining interest is reinvested to ensure the fund continues growing. Endowments are invested by pooling the funds together like a mutual fund. This allows for greater diversity in investments, lower investment costs, and the potential for maximum return on donor gifts.

The goal of the investment policy is to ensure that private gifts are managed well, invested thoughtfully, and used for the purposes specified by donors. Investment objectives include the preservation of capital, the protection of capital from inflation, and the enhancement of capital through market appreciation. With these objectives in mind, the majority of endowment funds are invested in equities, with the remainder in bonds and alternative investments.

The Benefits of Establishing an Endowed Scholarship

Creating an endowed scholarship shows a long-term commitment to helping students afford higher education. In addition to assisting students, endowed scholarships also come with benefits for the donor.

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Benefits for Donors

Naming rights: You may receive naming rights, often one that honors a person or family.
Invitations to university events: Invitations to university events may be extended.
Tax deductions: Contributions to scholarship funds qualify for immediate charitable tax deductions, with cash donations deductible up to 60% of Adjusted Gross Income (AGI) and appreciated securities up to 30% of AGI.
Satisfaction of supporting a cause you care about: There is the satisfaction of supporting a cause you care about.
Brand Recognition: If you own a business, creating an endowed scholarship can be a great way to build brand recognition and goodwill.
Legacy: The beauty of endowments is the legacy they create over time. Compared to a cash gift that is used immediately to benefit campus, an endowment invested over the long term will eventually provide even more support.

Benefits for Students

Financial Assistance: Scholarships help ease financial pressures, opening doors to educational opportunities that might otherwise be unattainable.
Access to Education: Thanks to your donation, they may be able to get an education they otherwise wouldn’t be able to afford.

Steps to Starting an Endowed Scholarship

Here are the general steps involved in establishing an endowed scholarship:

1. Partner with a School or University

Decide which school or university you want to partner with to set up the endowed fund. Endowed scholarships are established at colleges, universities, high schools, or other educational institutions. The educational institution must approve the creation of any endowed scholarship fund. Contact the school’s financial aid or development office.

2. Determine the Purpose and Criteria

The donor works with the university to determine criteria for awarding the scholarships, such as merit, financial need, specific majors, or other requirements. Define your eligibility criteria. The first step in launching your scholarship involves clarifying who will benefit from your fund. Your eligibility criteria translate your philanthropic vision into concrete parameters that guide scholarship selection. Consider which aspects matter most to your mission: geographic boundaries, academic disciplines, socioeconomic status, career aspirations, or specific challenges you want to address. Scholarship programs succeed when criteria clearly connects to the donor’s underlying values and goals.

3. Contribute the Minimum Amount

Contribute the minimum amount required by the school to establish the fund. The donor must make a sizable upfront donation, usually \$25,000 or more, to seed the endowed fund. The minimum donation required to start an endowed fund is usually substantial, often \$25,000 or more. A minimum of \$25,000 will establish an unrestricted endowment through any outright giving method using cash, securities, or personal and real property. Scholarships may start at \$50,000 for endowments with no restrictions or limited restrictions (merit and/or need) and \$100,000 for endowments with restrictions.

4. Sign a Gift Agreement

Your commitment to funding an endowment will be documented in a signed gift agreement with the Foundation. This outlines the designated purpose for your endowment and helps ensure that funds are used accordingly on campus. It also specifies the endowment’s name, which you can make in your name or in honor of someone special to you.

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5. Receive Updates

Receive updates from the school on the students benefiting from your scholarship each year.

Important Considerations

Before establishing an endowed scholarship, there are several important considerations to keep in mind:

IRS Rules and Regulations

It’s critical that you follow specific guidelines outlined by the IRS. Please make sure to consult with a qualified tax professional for additional guidance. Some of the most important IRS requirements for scholarship funds include:

Objective Criteria: Your scholarship must provide objective criteria for selection, meaning recipients cannot be chosen arbitrarily or based on personal relationships alone.
Accredited Institutions: Scholarship recipients generally must be enrolled as students at accredited educational institutions, though eligible institutions can include undergraduate universities, graduate schools, technical programs, and certain vocational training centers.
Educational Expenses: To give a scholarship that is tax-free to recipients, the funds must support genuinely educational expenses such as tuition, fees, books, and required supplies. Scholarships to cover living expenses or other needs may be taxable for the student.
Non-discrimination Policies: Adopting non-discrimination policies is crucial.
Conflicts of Interest: Preventing conflicts of interest is necessary.
Transparency: Ensuring transparency through regular updates is important.
Recordkeeping: Maintaining meticulous recordkeeping is essential.

Endowment Management

Managing an endowed scholarship program can be a tedious and time-consuming process. From collecting applications to selecting recipients, the administrative workload is immense.

Alternatives to Starting Your Own Scholarship

If you lack the resources to start a scholarship, you can still contribute to a scholarship fund.

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Houston Opportunity Scholarship: Donors who wish to support scholarships with a smaller initial gift may do so through the Houston Opportunity Scholarship.
Woodbury Scholarship Fund Dollars for Scholars: Anyone interested in creating an endowed scholarship can contact to express their interest.

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