How to Set Up a College Fund, and What It Takes to Start a Scholarship (Including the Minimums Colleges Require)

November 2, 2026
Posted by AmyGinsburg

When people say they want to “set up a college fund,” they usually mean one of two very different things. Some want to save for a child or grandchild’s education. Others want to help students they will never meet, often through a named scholarship at their alma mater, their church, or their hometown high school. Both are good goals, and both can be part of a thoughtful estate plan. The tools, the tax rules, and the price of admission are very different, though.

This guide covers both. First, how to set up a college fund for your own family. Second, how to create a scholarship fund, including the minimum dollar amounts colleges and community foundations typically require before they will administer one.

Part 1: Setting up a college fund for your own child or grandchild

Option 1: A 529 plan (the default choice for most families)

A 529 plan, named for Section 529 of the Internal Revenue Code, is a state-sponsored education savings account. The IRS summarizes the main benefits: earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses. Contributions are not deductible on your federal return. Key features for 2026:

Anyone can open one. Parents, grandparents, aunts, uncles and family friends can all open a 529 for a child. You are not limited to your own state’s plan. Tennessee’s TNStars plan, for example, is open to all U.S. residents.
You keep control. The account owner, not the child, decides when money comes out and can change the beneficiary to another family member if the first child does not need it.
K–12 and more. Up to $20,000 per year (up from $10,000 before 2026) can be used for elementary or secondary school tuition. 529 money can also pay for registered apprenticeships, certain postsecondary credentials, and up to $10,000 (lifetime) of student loan repayment.
Leftover money is not trapped. If the account has been open at least 15 years, up to $35,000 (lifetime) can be rolled into the beneficiary’s Roth IRA, subject to the annual IRA contribution limit ($7,500 for 2026) and other rules.

The estate planning angle. Contributions to a 529 are completed gifts, so they generally come out of your taxable estate, even though you keep control of the account. The 2026 annual gift tax exclusion is $19,000 per recipient. A special 529 rule lets you “superfund” an account by front-loading five years of annual exclusion gifts at once: up to $95,000 per beneficiary, or $190,000 for a married couple who elect gift splitting, reported on a gift tax return (Form 709). For grandparents who want to move money out of their estate and help with college at the same time, this is one of the most efficient tools available.

State tax benefits vary. Tennessee has no state income tax, so there is no Tennessee deduction to chase. Tennessee families should pick a plan for its fees and investment options. Pennsylvania, by contrast, allows a deduction for contributions to any state’s 529 plan, up to the federal annual exclusion amount per beneficiary. Many other states give a deduction only for their own plan. Check your state’s rules before you choose.

Option 2: A custodial account (UTMA/UGMA)

A custodial account under your state’s Uniform Transfers to Minors Act is simple and can be spent on anything that benefits the child, not just education. The tradeoff is control: the money legally belongs to the child and must be turned over to them at the age your state sets (generally between 18 and 21). Custodial accounts also count more heavily against the student on financial aid formulas than parent-owned 529s do.

Option 3: A Coverdell Education Savings Account

Coverdells offer tax-free growth like a 529, but contributions are capped at $2,000 per child per year, and higher-income families cannot contribute. Most families use them only as a supplement, if at all.

Option 4: An education trust

If you want more control than a 529 offers, or you are leaving a large amount, a trust may be the better fit. You can say exactly what the money may be used for, set age milestones, protect the funds from a beneficiary’s creditors or divorce, and name a trustee to make decisions after you are gone. Many families use a trust with a “health, education, maintenance and support” standard (see our post, What Can’t My Kids Do With a HEMS Trust?). A trust can also own a 529 account. For a side-by-side comparison, see Crummey Trust vs. 529 Plan: Which Is Better for Gifting to Children?.

A tip people often miss: tuition you pay directly to the school is not a taxable gift at all, no matter how large, under the gift tax “tuition exclusion.” It does not use up your $19,000 annual exclusion. It covers tuition only, not room, board or books, and the check must go to the institution, not to the student.

Part 2: Setting up a scholarship fund in your name (or a loved one’s)

A scholarship fund is a charitable gift, not a family savings account. You give money to a college, a university foundation, or a community foundation. That organization invests it, picks the recipients under criteria you help set, and pays the awards. In return you typically get a charitable income tax deduction (if you itemize), your name or a loved one’s name on the scholarship, and a legacy that can last for generations.

Scholarships generally come in two forms:

Endowed scholarships. The principal is invested permanently. Each year the institution pays out a percentage, usually around 4% to 5%, as awards. The scholarship is meant to last forever.
Current-use (annual or “expendable”) scholarships. You give money that is awarded right away and spent down. The scholarship lasts only as long as you keep funding it.

How much do you need? Typical minimums to establish a scholarship

This is the question most people ask first. There is no national standard. Each institution sets its own floor, and those floors have been rising. Here are published minimums from a range of schools and foundations:

Institution	Type of fund	Published minimum
University of Tennessee System (UTFI)	Endowed undergraduate scholarship	$25,000 (graduate fellowship $250,000)
UT Knoxville Athletics	Endowed student-athlete scholarship	$100,000
Penn State Abington	Endowed scholarship	$50,000 (payable $10,000/year)
University of Alabama	Endowed scholarship	$50,000 (raised from $25,000 in 2025)
Otterbein University (Ohio)	Named endowed scholarship	$50,000 (raised from $25,000 July 1, 2026)
Alabama A&M University	Endowed / current-use	$25,000 endowed; $1,000 per year current-use
Jacksonville State University Foundation	Endowed / annual	$25,000 endowed; $2,500 annual scholarship
Seattle University	Named annual scholarship	$2,500 per year for at least 5 years
CU Boulder (CMCI)	Current-use scholarship	$10,000 pledge, awarded at $2,000+ per year
North Carolina Community Foundation	Scholarship fund	$40,000 (full service); $25,000 (designated)
Community Foundation for Mississippi	Scholarship fund	$25,000
Benton Community Foundation	Named scholarship fund	$25,000
Miami County (KS) Community Foundation	Endowed / spend-down	$10,000 endowed; $1,000 expendable

The bottom line:

Endowed scholarships at colleges and universities: usually $25,000 to $50,000 to start, with $50,000 increasingly common. Athletic, graduate, and specially matched programs often require $100,000 or more.
Current-use scholarships at colleges: often $1,000 to $2,500 per year, sometimes with a multi-year commitment.
Community foundations: typically $10,000 to $40,000 for an endowed scholarship fund, with some accepting $1,000 or so for a spend-down fund.
You usually do not have to write one check. Most institutions let you reach the minimum through a pledge paid over five years (UT allows up to ten). Many also accept the gift through a will, trust, or retirement account beneficiary designation.

Why the minimums keep rising: the math. The University of Alabama explained its increase this way: at a 4.5% spending rate, a $25,000 endowment produces only about $1,125 a year, while $50,000 produces about $2,250. Schools want each named scholarship to make a real difference to a student and to justify the cost of administering it for decades. When you plan your gift, work backward: decide how large an annual award you want to fund, then divide by roughly 4% to 4.5% to estimate the endowment you need. A $5,000 annual award, for example, takes an endowment of roughly $110,000 to $125,000.

Step by step: how to set up a scholarship fund

Pick the home for the fund. A college or university is best if you are loyal to one school. A community foundation is best if you want to help students from a particular town or high school attend any college, or if your goal is too small for a university minimum.
Call the development or planned-giving office. Ask for the current minimum, the payout (spending) rate, any administrative fee, how long you have to complete a pledge, and when the first award will be made. Some schools wait a year after the fund is fully funded.
Define the criteria. Major, financial need, GPA, hometown, first-generation status, a high school, an extracurricular activity. Keep the criteria broad enough that the school can always find a qualified student. Criteria that are too narrow are a common reason funds sit unused.
Sign a gift agreement. This is the governing document. Read it carefully, and have your attorney read it too (see below).
Fund it with cash, appreciated stock (often the most tax-efficient choice), an IRA qualified charitable distribution if you are 70½ or older, or a future gift through your estate plan.

What to look for in the gift agreement

The name of the fund, and whether it can ever change.
Eligibility criteria and selection. Who chooses the recipients, and what role, if any, you or your family will have.
What happens if the purpose becomes impossible. For example, the major is eliminated or the high school closes. Good agreements say who may redirect the fund and to what similar purpose.
The spending policy and fees, including what happens if the investments drop below the original gift (an “underwater” endowment).
The pledge schedule, and what happens to money already paid if the minimum is never reached. Some schools fold it into a general scholarship fund.
Reporting. Will you get an annual statement and learn who received the award? Many donors find meeting their scholars to be the best part.

Tax traps to avoid

You cannot steer the scholarship to your own family. A gift earmarked for a specific student, or for a fund where your relatives are eligible, is generally not deductible and can create serious problems for the charity. If you want to pay for your own grandchild’s education, use a 529, a trust, or direct tuition payments instead.
Donor-advised funds have their own rules. You can recommend a grant from a DAF to a college scholarship fund, but you and your family cannot control who receives the award, cannot hold a majority or deciding vote on selection, and your family members cannot be eligible. (New to DAFs? See our guide to donor-advised funds.)
A private family foundation needs IRS approval first. A private foundation that makes scholarship grants directly to individuals must have its selection procedures approved by the IRS in advance (Internal Revenue Code § 4945(g), Form 8940). That process takes time and should be planned well ahead.

Making it part of your estate plan

Many of the most meaningful scholarships are created at death. Most colleges publish sample bequest language. The University of Tennessee, for example, offers language for a permanent named endowment with its $25,000 minimum. You can create a scholarship through:

A specific bequest in your will or trust, naming the institution and the purpose, ideally with a gift agreement signed in advance so your wishes are clear.
A beneficiary designation on an IRA or 401(k). Retirement accounts are often the most tax-efficient assets to leave to charity, because the charity pays no income tax on them and your children would.
A charitable remainder trust, which can pay you or your spouse income for life and then fund the scholarship.

The most important step is coordination. Your 529 accounts need successor owners. Your trust needs to say how education money is used. Your charitable gifts need to match what the institution will actually accept. A plan that says “$10,000 to start a scholarship at State University” can fail if the school’s minimum is $50,000 by the time you die. Give your executor flexibility, such as permission to add the gift to an existing scholarship or to direct it to a community foundation, so your gift is never wasted.

Ready to plan for education, for your own family or for students in your community? Contact Ginsburg Law Group to talk about building college funds and scholarship gifts into your estate plan.

This article is for general information only and is not legal or tax advice. Institutional minimums change frequently; the figures above were taken from each organization’s published materials as of November 2026. Please confirm current requirements directly with the institution and consult an attorney and tax advisor about your situation.