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Using Endowed Scholarships to Finance Higher Education

With increasing tuition costs, limited financial resources, and increasing student debt, endowed scholarships are playing an even more important role in helping students to fund higher education. Ensuring an efficient management process can make optimal use of this scarce resource.

By Juan Alejandro and Martin Stuebs

Endowed scholarships are a useful resource for students who need assistance in paying their postsecondary expenses. They are established through the generosity of regents, alumni, parents, and other individual and corporate donors. Received funds are invested and earnings are awarded to eligible students. Categories of stipulated criteria for awards often include academic performance, artistic and athletic abilities, cultural and religious backgrounds, special skills and talents, specific fields of study, and financial need. When eligible students are not identified, unspent funds are returned to the endowment pool and reinvested for use in subsequent periods. The endowment's principal is maintained and protected so that it can provide financial support in perpetuity.

A donor's endowment agreement designates criteria that can range from a few general provisions to many specific stipulations. For example, a donor could designate endowment funds for an academic unit such as the school of music or the department of accounting. The office of financial aid and members of scholarship committees are responsible for working within stated stipulations to select eligible students, determine award amounts, and communicate award information within required time frames to ensure scholarships are part of students' financial aid packages. With fewer or more general provisions, the financial aid office and committees have greater flexibility to award funds.

Managing and controlling endowment scholarships requires careful attention. Poor administration can lead to unused funds and the risk of a competitive disadvantage created when additional resources must be found to replace untapped endowment scholarships. Following are some reasons why scholarship administration can get off track and ways to improve the process.

Identifying Gaps in the Scholarship Process

Gaps or shortcomings in scholarship management performance can exist in four general areas:

  • Informal scholarship processes. Colleges normally have well-established procedures for managing the scholarship process. However, it is not uncommon for such guidelines to change over time because of increased student enrollment, faculty and staff turnover, and office and departmental reorganizations. These changes can contribute to procedures unintentionally becoming lax. Once formalized, operating standards can often digress into unofficial practices and guidelines. Thus, efficiency and effectiveness may be affected.
  • Unidentified students, unawarded scholarships. Mismanagement of information in the scholarship award process can have severe consequences for higher education institutions and add financial burdens to qualified and deserving students. Possible outcomes from informal procedures are unidentified students and unawarded, forgotten scholarships particularly involving departmental scholarship committees. Faculty members with multiple teaching, research, and service responsibilities primarily compose departmental scholarship committees. They rely on the financial aid office for data and direction. Without the necessary guidance, the committee might inadvertently allow scholarship funds to go undistributed for years.
  • Restrictive scholarship provisions. Institutions would prefer that donors establish scholarships with minimal provisions to increase the likelihood of identifying eligible students. Nevertheless, scholarships are usually established with strict eligibility requirements, such as, area of study restrictions (the student must be majoring in electrical engineering, for example); locational restrictions (the student must be from a certain city, county, or state); circumstantial conditions (the student must demonstrate financial need); and achievement conditions (the student must maintain at least a 3.0 overall grade point average). The result: highly restrictive provisions can cause an insufficient pool of eligible students.
  • Undermanaged donor relationships. The appropriate office normally has mature programs and activities to maintain strong connections with contributors. Several reasons may explain why this is not the case. For example, a development officer assigned to a specific donor, and who has developed a close relationship with that person, may leave the institution. Efforts to transition the donor activity to another development officer and maintain the historically strong relationship may prove ineffective without careful planning as to how the transition will be accomplished.

    Additional disconnects can occur when a new institutional president is hired. Donors may take a wait-and-see approach to see if they agree with the new leader on the direction the university will take. During this period, donors may become less active and, in turn, development officers may also unintentionally lessen their contact and communication with particular individuals.

    The consequence for undermanaged relationships regardless of the situation is the same: fewer endowed gifts to the university and possible severe hardship for students who rely on these gifts to help finance their education.

A Sequenced Solution

Institution officials can take several actions to better manage information about scholarship programs and opportunities, particularly if they manage a large number of endowed scholarships. (See Figure 1 for a brief summary of these actions.)

The suggestions are sequential, with subsequent steps building on earlier ones, and initial suggestions providing information for later steps. For example, documentation is needed for evaluation. Evaluation collects and compares actual results to expectations recorded in the documentation step. Documentation and evaluation information can be used to both assess scholarship accessibility and maintain donor relationships.

Following are explanations of the four steps:

  • Documentation. Formal scholarship management processes can become informal and undocumented over time, often as a result of institutional and personnel changes. With no documented of anchoring benchmarks, consistency, efficiency and effectiveness of the award process can be affected. Formalizing existing practices and updating documentation clarifies expectations and responsibilities for parties in the award process. For example, documented information shared with academic units to provide guidance can include the amount of available scholarship funds, the time frame for the scholarship committee to identify eligible students, and the deadline for submitting a list of recipients to the financial aid office.
  • Evaluation. Adequate documentation allows the institution to compare actual results to documented expectations. The internal auditor can serve as a valuable collaborator in collecting and analyzing data.

    Consider the fictitious example, outlined in Figure 2, of an internal audit of the award processes at a large university.

    Figure 2 compares the number of scholarship accounts and amount of available award funds to actual scholarships and funds awarded. The undistributed scholarships and funds obviously represent opportunities for improvement. In this example, scholarship committees can review improvements in scholarship award percentages from 2008 to 2009 and try to identify effective practices that led to this growth.

    Digging deeper into the data, Figure 3 lists the 75 scholarship accounts that were not provided to students in our example, along with each scholarship's unawarded amount, and identifies the party responsible for the scholarship award in order to initiate further discussion. For instance, the financial aid office may have been unable to award the scholarship because of restrictive provisions, or an academic department's scholarship committee may have been unable to schedule a timely meeting to select eligible students. In any case, this process can identify the causes for undistributed scholarships and initiate possible solutions.
  • Access. Restrictive criteria established by donors can limit the pool of recipients, and, in some cases, unintentionally constrain scholarship awards. Information collected from the documentation and periodic evaluation processes can help universities and donors identify and manage restrictions affecting awards.

    For example, details about scholarship funds untapped because of restrictions can lead to discussion on how to increase the flexibility of provisions and use of funds. The institution, for example, might request discretion to award donor funds in a manner consistent with donor intentions, if original restrictions cannot be fulfilled. This step ensures that scholarships are awarded to the greatest number of deserving students.
  • Relationships. Donors at all levels generally love the institution and are extremely interested in the impact and use of their funds. Communicating results to them provides important feedback, assuring donors that funds have been responsibly handled for maximum impact, building trust, and fostering a personal connection.

    The additional information collected and managed in improved award processes facilitates this important interactional aspect of the stewardship program. Using such data, the institution can ensure that the appropriate donors are included in formal award ceremonies, on-campus scholarship recipient dinners, and informal campus visits. These key events offer donors positive opportunities to meet scholarship recipients, listen to recipient stories, and see that their financial gifts make a difference. Simple acts, such as a student letter of thanks to the donor, can have profound effects on donors and are critical communication activities. They “close the loop” by sending feedback information to the donor that develops and maintains the relationship and plants the seeds for future possibilities.

In summary, the ongoing effects of the economic downturn continue to impose financial pressures on colleges and universities and students seeking a college education. Endowed scholarships are a key resource in meeting these financial challenges. Therefore, institutions must continuously search for efficiencies to better manage scholarships and maximize awards. After all, helping students afford a college degree is a win for both student and institution.

JUAN ALEJANDRO is director of internal audit and management analysis and MARTIN STUEBS is assistant professor of accounting in the Hankamer School of Business, at Baylor University, Waco, Texas.