Paying It Forward: A Donor’s Manual to Scholarships

Caroline W Hodkinson January 2, 2020

Paying It Forward: A Donor’s Manual to Scholarships

Scholarship qualifiers
When setting up a scholarship, it is imperative to remember what is – and is not – considered a tax-deductible charitable contribution by law. Examples include: 

-- If an individual wanted to pay tuition or other school-related expenses for a family member or friend, it would not be categorized as a “scholarship” or considered a tax-deductible charitable contribution under the federal tax law; 


-- While a scholarship designed to benefit a specific family or single student would not qualify, acceptable charitable classes might include female or male students, low-income students or those with specific academic or athletic interests, or even students from a certain school; and  
-- For a scholarship to classify as tax-deductible, the selection process must be objective and non-discriminatory. In this case, recipients must be selected from a “charitable class” which the IRS defines as a group of participants large and indefinite enough that supporting members of that class would benefit the broader community.

When setting up these scholarships, it is natural for many donors to want to be involved in the student selection process. Choosing to donate to a school directly, however, gives that academic institution management over the scholarship selection process. Though donors might be eligible to work with a school to establish specific criteria for the selection and may participate in part of the process, they would not have sole or majority discretion when weighing final candidates. This also applies to funding scholarships through community foundations, intermediaries or family foundations. Even stricter rules apply to private foundations, including severe penalties for failing to comply.

Managing your gift
Once donors have set up scholarships, new sets of questions often arise. One of the most common questions is “can I manage a scholarship program through my family foundation?” While possible, it is a complex, expensive and time-consuming process. Because regulations for private foundations are strict, the penalties for failing to follow them are significant, up to and including revocation of the foundation’s tax-exempt status. Private foundations also require IRS approval of scholarship plans prior to making awards; this includes attorney costs for drafting the plan, which must be specific in including a detailed selection process, processes for supervising the scholarship, record keeping, and retention (among other things). Given the complexities, it is suggested that donors consult investment and tax advisors to ensure a smooth process.  

The most sensible option for donors is to partner with one or more higher education institutions, community foundations, or other intermediaries that already maintain scholarship programs with the necessary infrastructure in place. Another option is to support an existing scholarship or design a scholarship program in collaboration with the organization that would permit ongoing involvement without being tied to the administrative responsibilities of managing the program. 

Another question donors frequently have is whether scholarships can be supported with a donor-advised fund (DAF). While individuals are not permitted to use a DAF account to directly provide scholarship grants to individuals, they can suggest grants to public charities, such as college and universities, community foundations or other qualified charitable organizations to support or establish scholarship programs run by those public charities. 

Significant impact
Whether making a small, one-time donation or setting up an endowed scholarship, supporting scholarships and financial aid is a direct and measurable step towards providing immense opportunities for students. If approached strategically, this giving process remains straightforward and stress-free so donors can spend more time focusing on the impact of their gift, rather than getting mired in the details. 

About the author
Caroline Hodkinson is principal and director of Philanthropic Advisory at Bessemer Trust. She leads a team that works with clients in the areas of planning, grant-making, governance, and family engagement, to create meaningful philanthropic impact. She also designs educational forums for clients on philanthropy best practices. Prior to joining Bessemer, Hodkinson worked for the University of Pennsylvania as Development Associate, supporting donor cultivation and alumni relations efforts for the greater New York City region. Before that, she was a Teach For America corps member, teaching high school biology and earth science. She previously served as board chair for a New York City literacy organization and currently advises a number of non-profits looking to monetize programs and scale nationally.

This material is for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material is based upon information obtained from various sources that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. Bessemer Trust or its clients may have investments in the securities discussed herein, and this material does not constitute an investment recommendation by Bessemer Trust or an offering of such securities, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference.

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