The singer Beyoncé is accustomed to applause but during her 2018 OTRll Tour, she announced something that really brought down the house: She and her husband Jay-Z would be awarding 11 college scholarships worth $100,000 each. Education can be life-changing, and financial help to pay for it can be one of the most powerful gifts you can possibly bestow. With a private foundation, you can donate to a school’s scholarship program, but you also have the option of running your own scholarship program and selecting the recipients.
Nuts and Bolts of a Scholarship Program
In designing a foundation scholarship program that complies with IRS regulations, much will depend on how the recipients are selected and who does the selecting.
If your foundation funds an educational institution’s scholarship program, and you are not involved in the selection of individual recipients, IRS approval may not be required. However, if you want to design your own scholarship program, and you want to select the recipients yourself, your scholarship program must be approved, in advance, by the IRS.
In approving these programs, the IRS looks for:
- A selection process that is objective and nondiscriminatory;
- A large selection pool of potentially eligible individuals known as a “broad charitable class;”
- Selection criteria that aligns directly with the charitable purpose of the scholarship program; and
- Systems to monitor whether recipients performed the activities for which they were selected.
Practical Tips and Best Practices
Do you want your scholarship program to address broader social goals or prefer simply to fund individuals on a case-by-case basis? Most scholarship programs consider applications one at a time. However, it is possible to design a scholarship program that fulfills a broader goal, such as bolstering the number of individuals with a specific skill or career specialty (e.g., a scholarship program to increase the number of female civil engineers). Whichever path you choose, you will want to think about what sort of impact you want to achieve and what your foundation can afford to do. Here are some factors to keep in mind:
Award size: Budgets typically drive the size and number of scholarships foundations award. Some foundations opt for impacting as many students as possible by structuring their programs to award tiered scholarships. They give a large number of nominal awards under $1,000, a few mid-level awards in the mid-five figures, and a small number of full rides. This option shares your foundation’s commitment to a larger audience of recipients, but your funds will only represent part of the recipients’ overall financial aid package. Other foundations offer fewer, high-impact awards that help students avoid applying for support through multiple sources.
Geography: Consider whether you wish to limit scholarships to local or regional schools, any accredited post-secondary U.S. academic institution—or even study abroad. Also, consider if you’ll impose geographical limitations on your candidate pool.
Grad or undergrad? Graduate study is a popular choice for foundation fellowships because the school’s mission and the foundation’s mission often align. For example, it might make strategic sense for a foundation dedicated to improving public education to fund fellowships at a teacher’s college. Others feel that investing in undergraduate degrees is the right tactic to level the playing field in education, while some go further by targeting community colleges to capture a higher number of first-generation scholars.
Criteria: Scholarships do not have to be based on financial need to be considered charitable. Determine what’s more important to your foundation: financial need, aptitude, or academic performance.
Eligibility: Should you decide to continue for the full four years, what standards must the recipients meet to continue to merit your support? For example, does a specific GPA need to be maintained? Can your candidate switch schools or majors? Take a year off? Will you consider only full-time students, or include part-timers in order to facilitate work-study?
Displacement: Federal law requires schools to reduce the financial aid package of private foundation scholarship recipients by the amount of the foundation scholarship grant, whether the scholarship grant is sent directly to the school or the student. Normally, schools will reduce their component of their financial aid package and leave the student loan portion of the aid package to the student. This practice, known as “displacement,” obviously helps the school more than the student. With help from a company like Foundation Source, your foundation’s scholarship program can be designed to maximize the benefit to your chosen recipient, rather than to the school.
If you’d like to forge a distinctive philanthropic legacy, there’s no more powerful tool than a well-designed scholarship program. With planning and perhaps a little professional help, you can easily wield that tool to put your personal stamp on the future.
Get The Best Financial Tips
Straight to your inbox
Subscribe to our mailing list and get interesting stuff and updates to your email inbox.
Thank you for subscribing.