What every student should know about college endowments

December 24, 2021

Dr. Michael Nietzel

Links to figures cited in-text may be found at the end of the article

College and university endowments made big news this year, largely because of the record increases in value many experienced. Endowment returns at Ivy League universities and numerous other colleges soared to new heights, with many seeing rates of return exceeding 30 or even 40%.

For example, Harvard University saw a 33.6% return on investments, bringing the value of its endowment to $53.2 billion, the largest of any in the nation. That was an increase of $11.3 billion in just 1 year. At Harvard, like at many other private universities, endowments are the primary source of annual revenue in the budget.

While most of the largest endowments are at private institutions, several large public universities have also reported big gains.

Yale University’s endowment reached $42.3 billion at the close of the 2021 fiscal year, an increase of $11.1 billion over the previous year. After a record $12.1 billion in investment gains in the past year, Stanford’s endowment stood at $37.8 billion. At the Massachusetts Institute of Technology, the endowment rose by $9 billion, and is now valued at $27.4 billion.

Washington University in St. Louis had one of the most impressive endowment returns in the nation, at 65%. Describing the gains as “a game-changing moment for us as an institution,” Chancellor Andrew D. Martin said he was “frankly blown away by these results.” WU’s endowment stood at $15.3 billion at the close of the fiscal year. Duke University’s endowment increased 56%, to $12.7 billion. Vanderbilt University reported a gain of 57%.

While most of the largest endowments are at private institutions, several large public universities have also reported big gains. The University of Michigan endowment grew 40.6% for fiscal year 2021, bringing its total value to $17 billion. The University of Illinois reported a fiscal year 2021 gain of 34%, with its endowments reaching $3.8 billion. The University of California’s endowment grew by $5 billion over the prior year, and was valued at $19 billion at the end of June. The University of Virginia posted a 49.5% gain, pushing its endowment value to $14.5 billion.

Beyond these eye-popping numbers, what do college students need to know about endowments? How do they work, and why are they important? Here are answers to 5 common questions students ask about higher education endowments.

1. What is a college endowment?

An endowment is a collection of funds and other assets given to an institution by other organizations and individuals to help support the school’s mission in perpetuity.

Endowments have 2 elements: the corpus or principal, which represents the amount of the donated gift, and the investment interest that is subsequently earned from that principal. In most cases, the institution cannot spend the corpus of an endowment–it only spends the interest that accumulates.

Endowments allow colleges to fund commitments on a recurring basis, because they provide the confidence that the necessary financial resources to meet those obligations will continue to be available.

Endowments can take a couple of special forms:

  • quasi-endowments allow the college to spend some of the corpus itself on an activity
  • term endowments also allow a college to spend some of the corpus, but only after a period of time in which the corpus could not be spent has passed

Donors restrict or designate most endowment gifts for a specific purpose. Occasionally, the gift is unrestricted, meaning that the college can spend the associated interest on priorities that it chooses. Endowment gifts usually include a written agreement between the donor and the institution, specifying how the gift must be used.

2. How do colleges invest their endowment assets?

Colleges and universities usually hire financial experts to make and manage the investment of their endowment. These managers try to balance preserving the value of the endowment with growing it.

In the early days of college endowments, real estate was the most popular investment. Today, the major investment areas are stocks and bonds. At colleges with larger endowments (for example, of a billion dollars or more), investments in venture capital and private equity have become increasingly common, because of the higher rate of return they often yield.

Endowment investment strategies can become controversial. At several institutions, students and faculty have raised concerns about investments in companies that are viewed as threats to the environment or that are associated with policies that are seen as contributing to social inequalities.

As a recent example, Boston University’s board of trustees voted in September to withdraw any endowment investments in companies tied to the fossil fuel industry, mainly crude oil and natural gas. That decision was the result of years of discussion with the university’s faculty and students, as well as climate experts, who argued that the university should not support entities that contribute to the climate crisis.

3. How do colleges use endowments?

At most colleges and universities, students are the main beneficiaries of their school’s endowment. According to a recent report from the American Council on Education, almost half of endowment spending (48%) is for student financial aid in the form of scholarships, grants, and other types of support.

The next 2 largest expenditures also have direct or indirect benefits for students. Support for academic programs and academic resources, including school libraries, accounts for 17% of total endowment spending. Faculty support, usually in the form of creating and funding endowed professorships and chairpersonships, consumes 11% of endowment spending.  These endowed faculty positions allow a university to recruit and retain faculty who are leaders in their fields.

For most colleges, endowments provide funding that’s essential to their regular budgets. Endowments also allow colleges to develop new programs and boost the student financial aid they offer far beyond what would be possible with tuition or state funding alone.

After seeing the windfalls that their endowments realized this year, some universities wasted no time in pledging how they would spend the new money.

  • Washington University in St. Louis has committed to an additional $1 billion in financial aid at the same time as it announced the adoption of need-blind admissions. This means that it will not consider an applicant’s financial situation when making admissions decisions, while still meeting 100% of demonstrated financial need.
  • Dartmouth College announced several new investments, including eliminating any expected parental contribution for families making up to $65,000, a 3% bonus for employees, an increase in the hourly minimum wage for student workers from $7.75 to $11.50, and a bonus of $1,000 for graduate students who currently receive stipends from the university.
  • MIT said it would increase endowment spending by 30% beginning in fiscal year 2023. That equates to an estimated $286 million in additional resources, which the university said will be used to address priorities such as increasing financial support for graduate students, modernizing campus facilities, strengthening classroom and digital learning experiences, and growing its investments in core research infrastructure, such as computing power.

4. How much of their endowments can institutions spend?

Universities set an annual endowment spending rate, which can vary slightly from year to year. The typical range is from 4% to 5.5% of the endowment’s value. Here’s an example. Assume a college has an endowment worth $100 million, with a rate of investment return for the year of 8%. If it spends 5% or $5 million dollars for the year, that leaves $3 million that’s plowed back into the endowment, serving as a hedge against future inflation, or existing as a contingency fund that can be tapped if necessary.

5. Why don’t colleges use their endowments to avoid tuition increases?

There are 2 answers to this question, which is probably the most common question that students ask.

First, because at most colleges, the largest category of endowment spending goes toward student financial aid, the endowment provides a cushion or cover for tuition increases, at least for many students. Without it, tuition increases would most likely be larger at most schools, particularly private ones.

Second, in most cases, donors have a written agreement with the institution that their gifts can be used only for a designated purpose. In some cases, these agreements specify that endowment dollars will not be used as a substitute for other resources, such as state funding or tuitions and fees.

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