Avoiding Unintended Consequences
One of the great advantages of having a private foundation is that it enables a donor to fund the educational aspirations of deserving individuals—whether through a school or through the foundation’s own scholarship program. However, under certain circumstances, a scholarship grant made by a private foundation may have the unintended consequence of reducing the amount of actual financial assistance awarded to a student.
When schools offer financial aid packages to students, a portion of the package is comprised of institutional award dollars that students need not repay, and another portion is “self-help” dollars, such as need-based student loans and work-study programs. Students are responsible for paying back the self-help portion of the financial aid package eventually, often with appreciable interest.
Federal law requires universities 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 university or to the student. Often, universities will reduce the award dollars of their financial aid package first and leave the student loan portion of the aid package to the student. This practice obviously helps the university more than the student. There are techniques, however, for designing your foundation’s scholarship program to maximize the benefit to your recipient, rather than to his or her university.
For example, let’s suppose that John’s tuition is $40,000 and University X had already promised $15,000 of scholarship aid from their own endowment, as well as an additional $15,000 in “self-help” loans. The foundation then sends University X a $10,000 scholarship check to be applied toward John’s tuition. The university might simply reduce its own scholarship commitment from $15,000 to $5,000 on account of the foundation’s scholarship. To avoid this outcome, the foundation should consider including language in its scholarship grant letter to the effect of:
“The Grant is made under the condition that it will first reduce the Student’s self-help aid dollars (loans and work study); specifically, the Grant should not be used to reduce the Student’s in-kind awards or financial assistance of any type with the exception of self-help aid dollars (loans and work study).”
Such language assures that the university, while remaining in complete accordance with federal law, is not penalizing the student by reducing his or her award.
In conclusion, scholarships are not only a powerful way of directly impacting lives through giving, but they help your clients create a legacy that aligns giving with their values and goals. Even small foundations can powerfully impact lives through scholarship funding. And by choosing nontraditional candidates, donors might be creating a stronger impact than they knew they were capable of.
But knowing the rules is an important first step if you want to make sure you don’t run afoul of the laws and end up hindering the student instead.
Page Snow is chief philanthropic officer at Foundation Source.