Setting Up Scholarship Funds
Scholarship funds are a very common form of philanthropy. Here are answers to some of the basic and often-asked questions about them.
The scholarship fund is one of the most idiosyncratic forms of philanthropy. Theres a one in Michigan just for golf caddies, and another in Hawaii for students who finish the Hawaii Marathon. There is a scholarship for left-handers, and one for women of good moral character who dont smoke tobacco.
Though it seems simple to give students money to pay for tuition or books or other things that are essential to a good education, there are some pitfalls to be aware of when it comes to taxes, accountability, compliance, and monitoring. (See "Scholarship Fund Resources," below.)
A would-be donor can take a number of routes to set up a scholarship fundestablish a private foundation, go through a community foundation or other public charity, or even sponsor it through a club or trade association. A corporate donor can use its own corporate funds or establish a fund through the corporate foundation. Though each option has its own special problems, some considerations apply to all of them. Following are answers to some frequently asked questions donors have on the subject.
How much money do we need to start a scholarship fund?
If were talking endowed scholarship fund, the blunt fact is that it simply doesnt make sense to start a scholarship fund with less than $25,000. Malcolm Peel, executive director of the Community Foundation of Greater Lorain County in Ohio, says: "If you have a smaller fund and want to make the scholarship renewable, you are pretty well eliminating new applicants for two, three, four years."
"You are really only looking at a $500 grant from $25,000," says Cynthia Schnack, a certified financial planner and director of marketing and development at the Hawaii Community Foundation, which administers about 60 scholarship funds.
One option for donors is to offer scholarships through a community foundation or other intermediary. The biggest intermediaries are the National Merit Scholarship Corporation and the Citizens Scholarship Foundation of America. Its possible to outsource all or part of the administration of a scholarship program. (More on this below).
Who gets the scholarship checkthe student or the institution?
Donors are sometimes attracted to the idea of giving money to the student rather than the school. But this arrangement is fairly rare. "Private foundations cannot give directly to a student without complying with some very stringent IRS rules," says Judith T. Burrows, director of the student aid program at the New Hampshire Charitable Foundation. "The IRS requires tracking of how the funds are spent"meaning that the foundation, if it funds the individual and not the organization, must collect receipts from the student. And, because some of the scholarship grant money is taxable, students are shocked to find they owe taxes on anything besides tuition, books, room and board, and certain kinds of supplies.
How do we establish criteria?
The founding scholarship document, often called the trust document, is the place that sets forth the eligibility and selection criteria. It also describes the awards duration and provisions for renewal.
Community foundations that handle a lot of scholarships strongly recommend the trust document be as flexible as possible. For example, instead of suggesting the student maintain a specific grade point average, a donor might specify an acceptable range. (See "A Menu for Flexible Scholarship Criteria," below, for how one foundation does this.)
Flexibility is especially important when a donor wants to target a scholarship to members of an ethnic minority group. In some states, the constitutionality of gender- and race-conscious scholarships has been called into question, though state university scholarship programs are the only programs affected thus far. (For more details on this, seeFN&Cs "Scholarships and the Race-Based Cases," November/December 1997).
Consider the burden of verification. The New Hampshire Charitable Foundation was approached by a donor who wanted to give a scholarship to students of Flemish descent. The foundation was advised by its counsel that this would be legitimate. Then came the question of how to check the specifics of each applicants family tree. "We told the donor that we could handle the trust as long as he did not require that we do some sort of genealogical check," Burrows says. "We were not going to discriminate between someone who claims to be one-sixty-fourth Flemish and another who claims to be one-fourth Flemish."
And flexibility regarding the amount of each award is helpful, too. The amount does not have to be fixed or spelled out precisely in the trust document. Its often better simply to specify the size of the award pool. This way, when tuition goes up, or if there are fewer or more qualified students, the fund can decide on an ad hoc basis how much to give to how many students.
What do advisory committees do?
It is quite common for scholarship funds to set up committees to select recipients and set policies. "Donors often want to put a lot of restrictions on their money," says Lynn Haff, program officer for scholarships at the Hawaii Community Foundation. "We recommend using an advisory committee that can draft up some guidelines. These would be approved by our board and our legal counsel as necessary, and they could be changed in the future." For example, instead of setting up a scholarship specifically for medical students and nurses studying in the field of pediatrics, the foundation would encourage the donor to target students specializing in health care. The advisory committee could further tweak the guidelines to emphasize pediatrics without committing the money to pediatrics forever.
The Santa Barbara Foundation administers eight scholarship funds and a student loan program. The 15 members of their student aid committee, including local college representatives, high school counselors and administrators, and the superintendent of schools, all volunteer their time. They meet once a month to review student applications, select the scholarship recipients, and set policies.
How do we get the word out about the scholarship?
There has always been a large number of national publications that list scholarships and how to get them. And now there are many Internet-based resources where students can look for leads to scholarship funds. Foundations with scholarships say these listings do indeed get the word out, but they recommend exercising some caution about what will reach the appropriate applicant pool. If a given scholarship funds only locally, for example, a good strategy might be to get listed in statewide directories but not national ones. In other words, sometimes its important to think about how notto spread the word.
For example, the George M. Pullman Educational Foundation gives scholarships only to residents of Illinoiss Cook County, and to lineal descendants of people who attended the Pullman Free School of Manual Training. So the foundation publicizes the scholarship through a network of local high schools and the alumni associations newsletter. Many locally oriented foundations say they rely heavily on word-of-mouth and networks with local schools. Some community foundations publish a "one-stop-shopping" booklet of all the scholarship funds they administer, making it relatively simple for a student to apply for several scholarships on one simple form.
What must we do to satisfy the IRS?
IRS rules are designed to make sure that scholarship programs benefit a broad charitable class of beneficiaries, and that the process is nondiscriminatory. You cant set up a foundation to give a scholarship to a member of your family, or restrict your eligibility requirements so that only your favorite neighborhood kid qualifies. The penalty for noncompliance could be a hefty excise tax or a loss of tax-exempt status.
An individual donors choice of whether to put scholarship funds in a community foundation or a private foundation will be influenced by tax issues, such as deductibility and payout requirements, and other considerations that vary according to donor preference.
Corporate foundations, however,have to follow a special set of guidelines. Many corporate foundations offer scholarships for children of company employees, but such a scholarship program must have the disinterested purpose of enabling these students to obtain an education solely for their personal benefit, and not for the benefit of the employer. The committee that selects the scholarship recipients must be totally independent and separate from the employer. The scholarship cannot be rescinded if the students parent leaves the company.
A company that wants to support promising students with the intention of recruiting them, or that wants to give its employees tuition reimbursement, is free to do so from corporate fundsbut not through the foundationand write off the cost as a business expense.
What about staffing vs. outsourcing a scholarship program?
Many foundations, especially private corporate foundations, use third-party agencies to handle all aspects of the scholarship program. Marilyn Rundell, vice president of Citizens Scholarship Foundation of America, says that 80 percent of the 600 scholarship programs it administers are for children of employees of the sponsoring company or corporate foundation. She explains that selection of recipients must be made by a committee made up of individuals independent from the private foundation and corporation concerned. Many corporate donors use intermediaries to assure neutrality and lend credibility to the program in the eyes of employees. "The second reason," she says, "is that by using outside agencies, these companies and foundations do not have to learn how to administer scholarships." (See "Management by Outside Agencies," below.)
Other foundations immerse themselves completely, even getting involved in the students personal lives. Project Choice, a project of the Ewing Marion Kauffman Foundation, is a high school dropout prevention program that offers low-income students scholarships for full college tuition, fees, room and board, books and other essential supplies. In return, the students and their families sign a written contract to graduate on time, remain drug-free and stay out of trouble with the law. Once in college, the only requirement is that they maintain a 2.0 grade point average.
The foundation ended up adding support services to help the students and their families keep on track because the staff found the attention of caring adults was a stronger motivator for the kids than was the free tuition, says Lynn Leonard. The Kauffman project staff stay in close touch with the students once they get into college, making sure they are reimbursed for supplies as they need them and arranging for mentoring and tutoring if they need it.
Leonard admits that administering such a program is complex and time-consuming. Nevertheless, she says, "You get so connected to the kids. I have seen kids that I enrolled in ninth grade go all the way through college. Its a labor of love."
Some colleges and universities will actually reduce the aid package offered to a student when the student receives funds from a private scholarship. Some donors are surprised to learn that some of the best-endowed institutionsincluding Harvard, Yale, Stanford, and Princetonhave the strictest aid displacement policies.
Ann Fergemann administered the Kalamazoo Foundations scholarship program for eight years and is now donor relations officer at the foundation. She says, "I know its going to be a difficult sell when I have to tell the donor that of the $1,000 in aid, $500 is going to help the student directly and $500 is going to reduce the grant that is awarded by the educational institution."
But Judith Burrows, director of the student aid program at the New Hampshire Charitable Foundation, says that people should look at the issue in a different light. "In fact, the Yales and Harvards are trying to do as much as possible to allow those with fewer resources to get to those institutions. Harvard has a need-met policy, which means that they will meet every students need through aid, work-study and loans. But they reduce their aid package, on a prorated basis, after the first $500 of an outside scholarship award comes in. So, for example, on a $1,000 award they would reduce the students loan obligation by 40 percent of the remaining $500. Now, that grant aid that was replaced didnt go back into the pockets of Harvardit helped another needy student go to Harvard."
Fergemann says most of the students who receive scholarships from the Kalamazoo Foundation go to colleges where every dollar works for them. But even in the relatively few cases where the school does replace part of its own funding with outside aid, she says she can usually present the situation to donors "in a positive way," and she adds, "If we can be less concerned about our turf and all work together, its really the young people who benefit."
Still, some donors, like the George M. Pullman Educational Foundation in Chicago, will not make awards to certain schools that practice aid displacement. "The position of the trustees is this," says Executive Director James Soderstrom. "We have to turn away youngsters every year. It doesnt make senseto our organizationto give a youngster an award if it is going to be displaced." This position has irked some financial aid directors, who say it ultimately denies high-achieving youngsters a chance to get recognition, since the foundations scholarships have considerable prestige. Soderstrom replies, "Theres some truth in that. But we just dont think its fair to take a kid with a need-met package at a university and turn away other kids who need money desperately. We are getting more and more poor kids coming in with unmet need packages."
To be sure a that student will benefit from every dollar of aid, some funders suggest a different strategy: offer to repay a students loan after graduation. Instead of awarding $500 renewable for four years, give $2,000 to a student upon graduation. Clever, but still debatable: Soderstrom personally believes that loan payoff grants are not the best solution. "Good financial aid is timely. Its real dollars at the time they are needed. Among working-class families the aversion to borrowing is very strongtheyve seen their neighbors cars repossessed. A scholarship in hand the year that you are going off to college has avery different meaningpsychologically than a promise that maybe the funds will be coming four years from now, after the tuition is spent."
The Kalamazoo Community Foundation, which administers 40 scholarship and loan funds, suggests to donors a combination of the following as possible eligibility criteria:
Kalamazoos guidelines then list the selection criteria that are found in programs the foundation already administers:
There are several options for foundations interested in outsourcing some or all of a scholarship program. There are several vendors offering scholarship services, toosome for profit, some nonprofitand following are a few of them:
Freelance writer and editor Virginia Peckham lives in New York. She wrote about funding minority scholarships in the November/December issue of FN&C.