Paying it forward with scholarships

Financial planning

May 23, 2022

Financial assistance can shape a college student’s future in meaningful and lasting ways. Learn how you can empower communities by investing in scholarship funds.

College allows students to further their education, build formative relationships, and create lasting memories. For many—especially first-generation students—it’s also a gateway to a financially stable future.

“People see education as a way to change the trajectory of not just an individual, but of a whole family,” says David Torre, senior vice president and GenSpring wealth strategist at Truist Wealth. “It can be a change for generations.”

But the cost of higher education remains a significant obstacle for families to navigate, many of whom require some form of financial assistance for their college-bound children.

A scholarship fund is a popular way for purpose-driven donors to fill that need. It’s an opportunity to take values-based investing a step further by funding someone’s success. And if your own college success was dependent on scholarships, you’re more likely to want to return the favor, says Torre, who is also a Chartered Advisor in Philanthropy (CAP).

“We definitely encourage that, and their gift can take on various forms,” he adds. Here’s what Torre says to consider when planning a scholarship fund.

Identify personal or family values

Establishing a scholarship provides a flexible way for you to uplift specific communities or areas of education that are meaningful to you.

Will the scholarship be merit- or need-based? Does it cover tuition for a four-year university, technical school, or community college? Maybe you want to support your alma mater, award STEM students specifically, or empower members of underserved communities.

These are just some of the ways a scholarship fund can be tailored to your values.

Establish meaningful goals

For many people, creating a scholarship is a way to build community. They enjoy getting to know their scholarship recipients either in person or through personalized thank-you letters and videos. Seeing students evolve through their college careers and transition to the professional world can be a rewarding return on investment.

If the goal is honoring someone’s legacy, donors would be wise to endow the scholarship so it lasts in perpetuity. An endowed scholarship means the financial gift is invested and its earned interest is disbursed each year (as opposed to the principal). For example, a one-time $1 million gift into an endowment can produce about $45,000 per year for scholarships—forever. Non-endowed scholarships are one-time gifts that must be funded each year.

Consider your gift amount

Deciding how much to contribute to a scholarship fund requires being realistic about the cost of higher education.

“A lot of clients have sticker shock when they see how much money is required to actually move the needle for a college student.”

— David Torre, senior vice president and GenSpring wealth strategist at Truist Wealth

Understanding the true cost of higher education will help inform whether the scholarship is intended to completely cover a year of tuition for one student or is spread out in smaller amounts to help multiple students manage school-related expenses.

Choose a source for the fund

There are options when it comes to funding a scholarship. Obviously, cash is king, but you can tap into more creative assets.

Instead of selling high-value stock and incurring hefty capital gains taxes, you can transfer the stock directly to a university or foundation as a fund source. You might also leverage expensive works of art, valuable real estate, or life insurance policies.

Truist advisors can help you select the most appropriate asset for funding a scholarship as well as guide the overall planning process.

Decide how to establish the scholarship

There are three primary frameworks for setting up a scholarship fund, each with its own benefits.

1. Community foundation

Board-led community foundations are public charities that play a critical role in identifying and alleviating community problems. There are more than 750 community foundations nationwide that manage financial gifts, vet scholarship applicants, handle disbursements, and perform the administrative tasks associated with the scholarship funds. Benefactors need only provide their financial contribution. Additionally, community foundations offer tax deductions up to 60% of the benefactor’s adjusted gross income (AGI) on cash gifts.

2. Private foundation

Individuals, families, or corporations can use private foundations to offer charitable endowments. This option gives benefactors more control over the management of the scholarship funds, but these foundations must clearly establish their own standards and processes for objectively vetting recipients as well as disbursing funds. They must also adhere to IRS rules and best practices. As a 501(c)(3), a private foundation can provide tax deductions up to 30% of the AGI on cash gifts.

3. Institution-based

Benefactors can work directly with a college or university to establish a scholarship. As with community foundations, the school can manage the selection process, disbursement, and administrative tasks associated with the scholarship. And since colleges and universities are tax exempt, benefactors can expect the same deduction as with private foundations.

The right way to establish a scholarship fund is simply a matter of personal intent. Whatever beliefs or values lead you to establish scholarships for your communities, Truist advisors can guide the planning to ensure your financial gifts are purposeful and lasting.