Can I Use My DAF for That?: Scholarships Edition

Author Gil Nusbaum, General Counsel

September 23, 2021

Giving for education is consistently one of the top philanthropic categories in the U.S. Last year, Americans gave a combined $71.3 billion to colleges and universities, K-12 schools, libraries and other educational nonprofits. Many donors see access to education as one of the most valuable gifts they can give, and their philanthropic efforts help them extend that gift to others.

Giving to or establishing a scholarship fund allows charitable dollars to benefit students and expand educational access. You can make grants to scholarship funds using your donor-advised fund (DAF) and there are a number of ways to structure such a gift. Below, we explore the ways in which DAF donors can support scholarships.

Scholarship Gift Structures

For donors who want their scholarship to help a student going to a particular school

  • General support: Scholarship donors are often motivated by their own positive educational experiences. A very common gift structure is for a donor to set up a fund at their alma mater or another school meaningful to them. The easiest way to do so is to work with the school’s development staff to establish a general support scholarship that will be held and managed there. General support scholarships are often used as a way to offer financial aid for low-income students. Depending on the size and structure of the donation, the grant may be expended annually, or given to populate an endowment fund managed by the school. With this kind of gift, the donor is rarely involved with the selection process.
  • Restricted support: A scholarship fund may also be used to support a student of a traditionally marginalized background, a student with merit in a particular field, a specific research interest, students of a particular demographic or with a proven talent (e.g., scholarships for Black women in STEM or scholarships for winners of an essay contest). As with general support scholarships, the donor will work with development staff not only to set up the fund with a grant to the school, but will also help to determine the criteria for applicants. A donor and their family members may even serve on the selection committee to determine the recipient, but that donor and people related to them cannot constitute a deciding vote, and cannot earmark the funds for any specific person.

For donors who want their scholarship to help students pursue education at a school of their choice

  • Existing scholarship funds: Donors may instead want to support deserving students, wherever they choose to study, allowing recipients to use scholarship funding at whatever school they select. For this kind of gift, a donor can make a grant to an existing scholarship program at a qualified nonprofit, such as a Boys & Girls Club, a fraternal or civic organization, a religious institution or a local community foundation. Generally, these organizations will already have stated criteria for the populations eligible for these scholarships (e.g., children aging out of foster care, or DREAMers); the donor will work with nonprofit staff to facilitate the grant to the appropriate fund. Again, the donor may serve on the selection committee, but cannot have sole or majority vote.
  • New scholarship funds: Some donors want to design their own scholarships from scratch, operating independently from individual schools or predetermined criteria. Because grants from a DAF cannot be made directly to individuals, a donor must work with a public charity qualified to set up and operate a scholarship program, such as Scholarship America or The Philanthropic Initiative. The donor will work collaboratively with organization staff to define goals, communication plans and criteria. Gifts like these are often committed on an annual basis to provide regular replenishment for the scholarship. This kind of scholarship gift is the most hands-on for the donor, but as always, the donor and members of their family cannot control a majority of the votes on the committee that determines the scholarship recipient.

Considerations in Establishing a Scholarship Fund

To comply with federal guidelines, there are restrictions on the ways a DAF donor can give to a scholarship fund. Because a DAF grant cannot go directly to an individual, the donor has to recommend a grant to a qualified charitable organization that will operate the scholarship fund, whether a school or another nonprofit. Additionally, the donor cannot earmark the scholarship for a specific person. The recipient selection must be made by committee or by a designee of the organization where the scholarship fund is managed.

Here is a breakdown of the options and restrictions for DAF donors funding scholarships:

DAF Donors CAN:

  • support existing scholarship funds administered by schools, universities and other educational nonprofit organizations
  • grant to scholarship funds for students attending a specific school 
  • serve on a review committee to select the scholarship recipient 
  • establish a new scholarship fund outlining key criteria for potential recipients (e.g., low-income students, students pursuing nursing degrees) 

DAF Donors CANNOT:

  • award a scholarship directly to an individual, or earmark a portion of the fund for any specific individual 
  • personally select the recipient of the scholarship to attend that school 
  • constitute, along with their family members, a majority of the votes of the review committee 
  • define criteria that are too narrow to constitute a “charitable class” of individuals 

Once a donor has selected a structure for the gift that satisfies these criteria, there are still questions they may wish to ask themselves so that they can design a scholarship fund that best achieves their access goals. Questions may include: 

  • What are your criteria? Is it a financial need, academic merit, or a combination of both? How will the organization assess applicants along these lines? 
  • What will your scholarship fund cover? Is it strictly to cover tuition, or are you interested in covering books, supplies and/or living expenses? 
  • What kinds of reporting will you request from the organization operating the scholarship fund, if any? Do you have any interest in access or communication between the recipient and yourself, and what are the operating organization’s policies on this kind of access? 

No matter what structure you choose for your scholarship gift, development staff at the organization managing the scholarship fund will be happy to walk through these questions with you. If you need further help, you can also reach out to NPT’s Philanthropic Services team at philanthropicservices@nptrust.org

Getting Started

By using a DAF and working with a trusted organization, donors can recommend grants to expand access to education through scholarship funds.  
 
If you are interested in learning more about funding scholarships with a DAF, reach out to us at npt@nptrust.org

Gil Nusbaum is NPT’s General Counsel. He is responsible for a wide variety of general corporate legal, tax and risk management matters and for overseeing NPT’s illiquid gifts program.

NPT does not provide legal or tax advice. This blog post is for informational purposes only and is not intended to be, and shall not be relied upon as, legal or tax advice. The applicability of information contained here may vary depending on individual circumstances.