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One of the cooler and more rewarding ways of giving back is paying it forward.
Endowing a scholarship at a beloved place of higher education can be a great, and surprisingly cost-effective, way to do good in the world while also realizing a tax benefit.
You even have the benefit of creating an opportunity for a select group of folks who might not otherwise have it.
Our good friend the White Coat Investor takes us through his experience of creating and endowing a scholarship at a popular university in his neck of the woods.
Endowing a university scholarship requires little effort, costs less than you might think, and allows you to be pretty specific about who gets the money.
Many of you know about The White Coat Investor Medical School Scholarship program. We run it right here on the blog. It is essentially an essay contest that gets close to 1,000 applications a year and is judged by dozens of blog readers. In 2020, five grand prize winners each took home $12,000 in cash and five second-prize winners took home $2,000 in cash. In 2021, we had 10 winners overall in the category of financial and inspiring stories. The scholarship helps us to promote financial literacy and directly reduce the indebtedness of a few students each year.
However, this scholarship program requires a lot of labor to run and requires annual fundraising. It is funded by contributions from regular readers, by soliciting sponsorships from our advertising partners (including offering sponsored posts on the blog to five platinum sponsors a year, which usually attracts some flak from readers), and by a substantial contribution from WCI profits. Without providing that labor and doing that fundraising, there is no scholarship. The likelihood that the WCI Medical School Scholarship Program continues for a long period of time in its current form is probably pretty low. Not much legacy there.
As Katie and I have built wealth beyond “enough” (financial independence), our focus turns more from earning, spending, saving, and investing toward giving, estate planning, asset protection, and legacy building. We are highly motivated by a desire to provide for others but without ruining their lives with the gift. “Others” range from family members to people on the other side of the globe. A couple of our college friends who also became quite financially successful have similar issues and desires. Knowing they had started some scholarships at our alma mater, we asked to be put in touch with their contact. It turned out the process was MUCH easier than I had expected. So, we endowed a couple of scholarship funds in 2021, and we will likely do some more in later years.
Aside from having enough money to endow the scholarships, we have also benefited from the assistance of others in obtaining our education. We both worked in college (especially during the summers) and had some help from our immediate families (Katie’s >> mine). Katie also received a bit of “education money” from her grandparents but mostly didn’t need it for her actual education due to scholarships and hard work. Our grand total of student loans upon completing two bachelor’s degrees, a master’s degree, and an MD was the $5,000 I borrowed as a college freshman. We both had academic tuition scholarships as undergrads. Her niche graduate degree in Adaptive Physical Education was essentially paid for by the program itself. And as most of you know, my medical school was paid for via a contract program with the US Air Force known as the Health Professions Scholarship Program. So we view these scholarship endowments as “paying forward” what we received ourselves. It is something we’ve always wanted to do. Now we can, so we will.
What Is an Endowed Scholarship?
The aim of an endowed scholarship is to donate money that can be invested and managed by the university so that the interest that’s earned on the principal of the donation can then be used as a yearly scholarship to those students who need it. An endowed scholarship is not supposed to be a one-off. Instead, it’s supposed to continue to produce income for years and is supposed to help a number of students instead of just one.
This is different from funding a regular scholarship, where you’d donate a set amount of money and it goes directly into a scholarship fund. The money isn’t invested. It’s just given to students directly. If you want a regular donation to last for years, well, you’re going to have to give money to the university every year.
Yes, an endowed scholarship will require more money than a regular scholarship—maybe $50,000 for an endowed scholarship, maybe $100,000—but the gift should last for much, much longer.
How to Start a Scholarship Endowment
It turns out that universities want your money, so they make it really easy for you to give it to them. Our friend introduced us by email to his contact at Brigham Young University Philanthropies. Over the course of two or three months, we had all of our questions answered. It was great. He was always available, but we never felt rushed. In the end, the process was super basic. The university attorneys draft up a “letter” describing the endowment fund, and we send them some cash. That’s it. Like all the rest of our charitable giving, we run it through our Donor Advised Fund (DAF) for convenience and anonymity. All communication was by email, and everything was signed electronically. Easy-peasy.
How Much Does It Cost to Endow a Scholarship?
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One of the best parts of Brigham Young University is that every year it is rated as one of, if not THE, best educational value in the country. It is a large, private university with a pretty good academic reputation in many fields (and one of the best non-Power 5 football teams, I might add). However, its tuition is less than in-state tuition at most flagship state universities and at many community colleges. For the 2020-2021 year, tuition was just $5,790 for the two main semesters. Since the cost is so low, endowing a scholarship that will provide a full-ride scholarship is also relatively cheap. While there are no guarantees that the endowment fund will provide a full-tuition scholarship to a student every year, the cost is essentially $120,000 for a full-tuition scholarship and $60,000 for a half-tuition scholarship.
It does not pay out to a student in the calendar year that you make the endowment or in the next calendar year, but it is felt that it will likely provide a full-tuition scholarship every year indefinitely after that. It works out to be about a 5% “return” on the “investment.” If you want the scholarship to pay out immediately, you can just add the first year’s “distribution” to your contribution and get started right away. You could do the same (at least during your lifetime) in a year when the fund is unable to distribute a scholarship due to poor returns. We funded these at the end of 2020, so they will start paying out in 2022.
You do not have to fund this during your lifetime, either. You can designate money in your will or trust to go to the university. You can name the university as the beneficiary of your life insurance policy. You can even use a charitable remainder trust. The university even lets you into a special “Jesse and Amanda Knight Society” just for naming them in your will, trust, or policy at any amount.
If you’re wondering what it would take to endow a similar scholarship at your alma mater, just multiply tuition there by 20.
Endowed Scholarship Recipients
The other part of the process I found particularly impressive was just how much control you can have over who gets the scholarship. You can’t be on the scholarship committee and you can’t name your kids or those of a neighbor as the recipient or anything. But as long as the criteria are reasonable and achievable, you can make the criteria whatever you want them to be.
You can name a gender, race, state or country of origin, major, career ambition, talent, economic status, GPA, etc. In the end, we kept the two scholarships we funded fairly easy with relatively broad criteria to leave maximum discretion to the scholarship committees. You can also name the scholarships. You can name the scholarships after yourself, a family member or mentor you wish to honor, or even a business. Here is the meat from each of the letters of our two funds:
The Pre-Med Scholarship
“To Philanthropies BYU:
The purpose of this letter is to establish the White Coat Investor Pre-Med Endowed Scholarship Fund at Brigham Young University (BYU). The undersigned intend (without obligation to do so) to recommend that a grant for this purpose in the amount of $120,000.00 be made to BYU contemporaneously with the signing of this document from a donor advised fund created by the undersigned. Other contributions may be made from time to time at the discretion of one or both of the undersigned, or by other donors. However, contributions consisting of assets other than cash may be added only upon the prior consent of BYU. Unless specifically designated as currently spendable in writing at the time of contribution, additional contributions shall be added to the principal of this endowed fund.
This fund shall be administered by a committee (Committee) consisting of BYU personnel appointed by the Director of Student Development Services at BYU. Awards shall be made from currently spendable amounts and available earnings from this fund on an annual or more frequent basis for one or more selected students who are pursuing a degree at BYU, who are in their junior or senior year, who have expressed an intention to attend medical school, who have successfully completed at least 20 credit hours of science classes with a grade point average of at least 3.3 (on a 4.0 scale) in such classes, and who are deemed by a Pre-Med advisor to be likely to matriculate to medical school in the next approximately two years. Those receiving awards shall be eligible for awards in more than one academic year.
Once the initial contribution is made, this endowment fund shall exist in perpetuity, or for as long as BYU policy permits. Management of the endowment (including but not necessarily limited to, investment, determination of income, and payment of any unusual expenses directly related to its administration) shall be reasonable, prudent, and in accordance with policies of BYU and any applicable Utah laws regarding the management of institutional funds, such as the Utah Uniform Prudent Management of Institutional Funds Act, or any other similar act which may be enacted. Modest portions of endowment income may be added to principal from time to time so that there can be growth in the endowment fund.
Subject to the foregoing criteria and BYU policy, the Committee shall have full discretionary power regarding the selection of recipients and the amount and timing of awards distributed to or on behalf of each recipient. Reports and correspondence should be sent to the undersigned at the address shown above.
If for any reason in the future the purpose or purposes for which this fund is established no longer exist or become impractical, this fund shall instead be used for such charitable purpose or purposes as closely related as possible to the purpose or purposes stated above as may be determined by the President of BYU.
Reference herein to any college, school, department, institute, center, organization, committee, board, office, major, class, program, position, or personnel at BYU, shall include and shall also refer to any successor of such college, school, department, institute, center, organization, committee, board, office, major, class, program, position, or personnel at BYU.
BYU will be the absolute owner of the fund and shall use reasonable care in overseeing the administration and investment of the fund. However, BYU shall not have the duties of a trustee.
The provisions hereof may be amended or modified in whole or in part by agreement in writing signed by BYU and by the undersigned, the authorized agent or assignee of the undersigned, or, after the death or incompetency of one or both of the undersigned, by the survivor or the other of the undersigned, or, if both of the undersigned are deceased or incompetent, by a direct descendant of the undersigned, regardless of whether or not there are other donors to this fund.”
Our goal for this scholarship was to have it go to someone who was actually going to medical school, not one of the thousands who say they’re pre-med as freshmen. That’s why we set up the requirement to be an upperclassman with a decent science GPA. Since there is no pre-med major, we decided to leave it up to the pre-med advisors (who make up most of the committee anyway) to determine if the recipient was actually likely to go to medical school. Now, pre-med advisors are obviously not perfect in determining that (it seems like many docs recall being told by a pre-med advisor they’d never get in), but we figured they could at least find one person to give the scholarship to each year. At any rate, now there are two White Coat Investor scholarship programs, one for medical students and one for pre-meds! But only one of them is set up to exist in perpetuity.
The Education Scholarship
The other scholarship letter reads similarly, except for this section:
“The purpose of this letter is to establish the ———— and ————- Endowed Scholarship Fund at Brigham Young University (BYU). The undersigned intend (without obligation to do so) to recommend that a grant for this purpose in the amount of $120,000.00 be made to BYU contemporaneously with the signing of this document from a donor advised fund created by the undersigned……. This fund shall be administered by a committee (Committee) consisting of BYU personnel appointed by the Dean of the David O. McKay School of Education (McKay School) at BYU. Awards shall be made from currently spendable amounts and available earnings from this fund on an annual or more frequent basis for one or more selected students who have been accepted into the Elementary Education major in the McKay School or who have been accepted into another teaching major within the Educator Preparation Program at BYU. Those receiving awards shall be eligible for awards in more than one academic year.”
How to Name a Scholarship
We named this scholarship after Katie’s grandparents, who had long careers as a school district superintendent and a teacher. Education was always very important to them and emphasized in her family. Despite living on the income of educators, they put away money early for each of their grandkids to assist with their educations, and they have even founded a fund to help future generations of their descendants obtain university educations. Interestingly, the university made us get their written permission to name the fund after them.
We have some ideas for other scholarships, too. For instance, I played on a club hockey team while I was there, and it would sure help recruiting if that team had a scholarship or two to offer recruits.
As you can see, endowing a scholarship is relatively easy and perhaps not as expensive as you might have thought. You also get plenty of control over who receives the scholarship. If you have ever wanted to endow a scholarship, I would encourage you to contact your favorite university today to get the process started.
What do you think? Have you endowed a scholarship before? What was it like? Do you plan to do it later in life or at your death? Why or why not? Comment below!
10 thoughts on “How Do You Endow a Scholarship and How Much Does It Cost?”
Right. I think many people miss that the 4% guideline is for the worst case scenario.
I believe in the majority of the time you would actually have a larger balance in 30 years than you started with. And sometimes much larger.
Thanks. It is helpful to hear your experience at BYU. Another place to look is at local foundations. For example the Foundation for the Carolinas here in Charlotte has many scholarship funds.
Once our children finished college we decided we had paid college tuition for 12 years, why stop? We contribute enough annually, that combined with a Pell Grant, will cover full tuition in a state school.
We choose a fund that gives scholarships to graduates who live or have lived in public housing. We choose for it to be used in the current year, but we could just add to the endowment. The program also provides mentoring and keeps a relationship with the students through college. Something we couldn’t really provide on our own.
Thanks. It is helpful to hear your experience at BYU. Another place to look is at local foundations. For example the Foundation for the Carolinas here in Charlotte has many scholarship funds.
Once our children finished college we decided we had paid college tuition for 12 years, why stop? We contribute enough annually, that combined with a Pell Grant, will cover full tuition in a state school.
We choose a fund that gives scholarships to graduates who live or have lived in public housing. We choose for it to be used in the current year, but we could just add to the endowment. The program also provides mentoring and keeps a relationship with the students through college. Something we couldn’t really provide on our own.
My dad and uncles went to the same Catholic high school and after my uncle passed away from cancer, they established a scholarship. At first it just helped 1 student for 4 years but through donations and growth, they are able to fully fund at least 4 students for all 4 years of high school. While religious school may not be for everyone, these students are benefitting and it’s a great way to honor my uncle’s memory.
Because the Uni doesn’t do a distribution if it is a bad year.
Great article. Very interesting. Getting the idea from Benjamin Franklin who donated money to Boston and Philadelphia that would grow for 100 years in value I set up an endowment fund for my church recently that only pays 2% of its value each year. It has to be invested in VTAX at vanguard or similar investment at 100%. And there can be no management fees! If stocks continue to return 10% and inflation runs 3% then the annual return should be 7%. Using the rule of 72 it should double every 15 years in value and the annual amount available should grow indefinitely. Similar to you I donated $100,000 from my donor advised fund. I also put a cap on distributions at $400,000 in today’s dollars before the money is spent on a program to improve financial literacy and charitable giving.
This is such a great idea! I did wonder about how the mechanics of the endowment are able to achieve this 5% “return”. If we are able to endow a full tuition scholarship for 20X the amount of tuition today and the scholarship continues to cover that full tuition in perpetuity even though tuition tends to increase at an even higher rate than the CPI, why do we only have a 4% (or maybe even lower now) sustainable withdrawal rate (SWR) for investment portfolios? In both cases the SWR is covering a sum which increases with inflation. Most of the SWR studies have been based on success rates for 30 year withdrawal periods but the scholarship is paying out forever. The university of course doesn’t have to worry about taxes but the SWR is also not accounting for taxes. Why does the university endowment have a higher SWR?
I think this is a good question. Private foundations are actually required by law to spend 5% of their assets every year. Obviously, no private foundation ever runs out of money. Instead, they usually grow in size significantly over time.
It’s similar at a college. They can plan to draw 5% off of their endowment and never face any risk of running out of money.
The main reason I often hear is that foundations and endowments have a longer time horizon (often perpetuity), which improves their investment returns over the long term.
But I tend to think that it helps to highlight how conservative the 4% “safe withdrawal rate” is. There are a lot of reasons why the investment industry would like retired people to withdraw as little money from their investments as possible. The primary one is that the more you leave in investments, the more money they earn. So I think there’s a systemic bias toward overly conservative, or low withdrawal rates, in the investment industry.
Right. I think many people miss that the 4% guideline is for the worst case scenario.
I believe in the majority of the time you would actually have a larger balance in 30 years than you started with. And sometimes much larger.
Right. I think many people miss that the 4% guideline is for the worst case scenario.
I believe in the majority of the time you would actually have a larger balance in 30 years than you started with. And sometimes much larger.