There are scholarships at my University that have been around for a few decades. Do people top them up constantly?
In: Economics
Most scholarship funds are set up as endowments. A donor gives a bunch of money to a school who then gives it to a fund manager to invest in financial instruments like the stock market. When those investments generate profits, it’s those profits that are then used to fund scholarships for students. This way the initial donation could fund scholarships in perpetuity, in theory.
Two ways:
They are topped up, either from private donations or government grants.
There is a large endowment that generates investment income every year – the income is given away but the principle of the endowment is untouched
The funding mechanism can vary. Sometimes it is funded by a foundation or alum donating money every year. Sometimes it is funded by a very large donation that can be used to invest in bonds, stocks, real estate etc. which provide recurring revenue in the form of interest, dividends, appreciation of value and so on.
Scholarships are typically based on an endowment. This is a large amount of money that is invested, and the returns from the investment are used to pay for a recurring expense like a scholarship. So for example, if you wanted to endow a scholarship worth $30,000 per year, you could donate a $1 million endowment, which would get a yearly return in the stock market of 3% (at least) on average, and you would use that 3% of $1 million to pay for the scholarship.
This is the main way that places like universities budget for any recurring expense. That’s why they have such large endowments and why they are willing to give professors such strong job security.
Some get topped up, some are so big that they can run on their interest…
…and some do have a limited lifetime. A donor’s estate might give you $20,000 and ask you to give it out, and so you use one or two thousand a year until it’s all gone. (Source: My wife worked in a school’s fundraising department.)
Usually they have endowments and use the interest only to fund the scholarships, or only dip into principal to a level that market increases will replace.
So a $1m endowment might kick off $50k per year in interest payments, which allow for $50k worth of scholarships granted annually.
In my corner of the world at least, there are some scholarships granted by government entities (e. g. for low income students or mobility scholarship programmes). In that case, the money comes from taxes, meaning when the administration decides their budget plan (usually right after an election), they agree to set aside x% of tax income for education, and y% of that sum is dedicated to the scholarship fund (and z% to faculty salaries etc. pp.). That amount might be adjusted for inflation at some point, and it usually gets renegotiated when the government changes.
Others have explained how private scholarships work.
You don’t touch the principle. The scholarship is paid with the interest on the financial investment. If the scholarship is $500 a year, the principle is likely $10,000 or more.
Typically these scholarships are not all given out of the same principal amount. The donated amount, called an endowment, is usually invested and actively managed in a way that generates more money, and this money is given out for the scholarships. The bigger the endowment, the easier it is to make money off of it in a relatively safe and consistent manner, which allows for long term stability. It may also be grown and expanded through donations or as a natural consequence of investing, since long term investments can easily grow to a much larger size over time.
Your endowed professor doesn’t merely have an impressive chest, her salary is paid from the earnings of an account that was established to pay her salary.
For instance if you wanted to endow a chair at your local university you could cough up $4,000,000 and donate it to the university’s foundation. They’ll invest the money and pay back to the university (these days) 4% to whatever your donation agreement indicated. As long as your donation was intended to fund a professorship, you are providing $160,000 in perpetuity toward the salary for the professor who was endowed by your gift.
The same works for student scholarships.
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