Endowed scholarships are one of the most common forms of philanthropy. Providing funds for students to complete an education is not only a worthy charitable cause, but the endowment creates a scholarship in perpetuity. That means the college, university or institute invests the financail gift and uses the return on the investment to fund scholarships. With successful endowments, the principal funds are never touched.
Establish an amount that you would like the endowed scholarship to provide each year. Talk to a development officer at the college or university about how much principal would be needed to support an annual scholarship of that amount.
Choose a name or designation for the scholarship, such as to honor or memorialize a specific individual.
Bear in mind the amount of the scholarship is based on the return on investment from the endowed principal. If the initial gift is $50,000 and the investment nets a 5 percent profit in the first year of the endowment, then the available scholarship money is $2,500 for the year. To aovid spending the principal, the endowment will have to grow at an annual rate of 5 percent to keep the $2,500 scholarship constant from year to year. The school may advise rolling over a portion of the annual investment returns to build the endowment and, over time, increase the scholarship's annual value or to create funds for additional scholarships.
Decide on a purpose for the scholarship by determining the type of student who should benefit from the funds. Will the scholarship be based on academic performance, financial need, future promise, career path, athletics or some other combination of factors? Some donors set scholarship parameters to encourage recruitment of students from specific geographic regions.
Know that some states have raised constitutional issues about scholarships that target specific minorities and ethnicities. In areas where such scholarships may be acceptable, there is also the issue of verifying the student's heritage.
Work with the development officer of the school to determine how the scholarship will be disbursed. Decide if the funding goes directly to the winning student or if the school will manage the money, as there are IRS reporting requirements depending on who handles the funds.
Discuss the tax implications of the endowment gift with a qualified financial advisor.