Most people assume that creating a scholarship for college students is something only a multimillionaire would consider. But you don’t need to be a tycoon to leave a lasting legacy for students. 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 deserving students over a long period of time — and receive a tax deduction along the way.

What is an endowed scholarship?

An endowed scholarship is a donation made to a college that earns interest each year. When you endow a scholarship, you’ll give a university, college or local foundation a certain amount of money. Then the organization will invest it how it sees fit and use the proceeds to fund a scholarship for years to come. You can add more funds over time, but the principal amount itself 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, and they’ll 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 details sorted out before signing on the dotted line. 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 through your principal donation is used as the award money.

Who can endow scholarships?

Anyone with extra funds can endow a scholarship, though the minimum amount depends on the university. Most schools have an endowment requirement between $25,000 and $50,000. Endowments can be made in cash, although some schools, like San Diego State University, 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 sketch out 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 provide nearly $2,500 per year. This could be distributed to one student or split between two.

What are the tax benefits?

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.

The 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. Then reach out to the development office of your chosen university to learn more about the process.

Frequently asked questions

  • An endowed scholarship entails giving to the university, but that donated amount is then invested by the school. The interest on the donated amount pays for scholarships down the line, often year after year because the school does not spend the principal. You can later give more money to the scholarship, as well. Non-endowed scholarships are typically one-time donations, often for a single award.
  • You may wish to consult with a lawyer or financial professional. You might make sure you are in compliance with state or federal law. You can see how creating an endowment might affect your taxes. If you decide to make part of your estate an endowment after you pass away, you may want to work with a lawyer to make sure your will covers this donation adequately.
  • Yes, giving cash gifts such as an endowment can make you eligible for a charitable deduction. Generally, you can take a charitable deduction for up to 60% of your adjusted gross income if you make a cash gift while alive. If you go above 60%, you can generally even carry over the contributions for five years.