Donor-Advised Scholarships

Vol. 13 No. 4

development eletter Vol13 No4 lawfulgifts

A donor establishes a scholarship fund at your school—maybe to attract more diverse applicants or to help remarkably qualified applicants who need financial assistance. The donor, however, expects to have a final say in who receives the scholarship, because it's “her” money providing the opportunity. This type of conflict of interest when it comes to scholarship distribution can quickly lead down a slippery slope of unlawful practices. In fact, other "standard practices" around donor-funded scholarships may be illegal altogether.

If you’re in any doubt whether a practice is unlawful—even if it seems like a common-sense decision and the “right” thing to do—you should consult your school’s lawyers to avoid any entanglements. There are, however, a few common pitfalls we see often enough to feel they're worth warning against.

At their core, laws and policies like the Pension Protection Act of 2006 and various portions of the Internal Revenue Code work to preserve a “level playing field” for potential scholarship or grant recipients. Anything that could possibly create an “unfair” advantage for one recipient over another, then, should be avoided as best as possible. But what’s considered “unfair” can be a difficult pill to swallow, especially as you try to maintain good relations with generous donors.

Take our original example of a donor who demands to be able to determine the final recipient of the scholarship, effectively relegating the Selection Committee’s decisions to “recommendations” as she makes the ultimate decision. This would be considered illegal under the current regulations, considering how the law accounts for the various types of scholarship funds.

A donor-advised scholarship fund keeps the donor involved with a Selection Committee, and everyone handles all tasks and decisions equally. In an administered scholarship fund, the nonprofit—the school—handles all administrative tasks and application processes, but the Selection Committee and the donor mutually agree on a recipient. A designated scholarship fund removes the donor from the decision-making process, leaving the school to handle all applicant and awarding decisions.

Furthermore, no scholarship fund can be controlled, either directly or indirectly, by the donor—even if the fund is categorized as "donor-advised." The donor may offer advice as a part of the Selection Committee, which is appointed by the school. She may even sit on the committee with full voice and vote. But ultimately, the decision of which applicant is awarded the funds will be made according to a set of predetermined guidelines and procedures.

“Donor control” can occur in several different ways, including:

  • Only considering applicants selected by the donor;
  • The majority of the Selection Committee consisting of the donor’s relatives or business connections;
  • A contingency of continued donation placed on the selection of a particular candidate; and
  • The final call on a scholarship award. (This must remain with the school and not with the donor.)

Again, if you worry that your donor-advised funds are in any way compromised, consulting your school’s attorney as soon as possible is the best course of action. Clarifying the rights and responsibilities a donor has toward his or her scholarship before the gift has been made can also preserve the relationship and avoid any presumptions before it becomes an embarrassing, possibly illegal mess. Common sense can prevail so long as you follow the fundamental rules by which your private-independent school must play.

Additional ISM resources:
ISM Monthly Update for Development Directors Vol. 9 No. 2 Now More Than Ever—Tell Donors What Their Gifts Will Achieve
ISM Monthly Update for Development Directors Vol. 9 No. 9 The Donor Bill of Rights

Additional ISM resources for Gold Consortium members:
I&P Vol. 32 No. 6 Why Getting a Quick, Large Gift May Be a Campaign False Start
I&P Vol. 36 No. 4 The Three Types of Need-Based Financial Aid

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