What Is a University Endowment?
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- Endowments are ongoing funds universities use to achieve short- and long-term goals.
- Donors can stipulate how and when an institution may use an endowment.
- Trustees usually invest part of the funds, using the returns to extend the life of an endowment.
- Endowments help pay for financial aid, professorships, and research and development.
You've probably heard of endowments, but what role do these funds play at colleges and universities? Endowments can be used for a variety of purposes over a finite period of time or even indefinitely. These special monetary gifts allow higher education institutions to achieve both short- and long-term goals.
In this article, we explain what endowments are and list the largest university endowments in the United States. You'll also gain insight into how schools use these funds and the benefits they provide students and faculty.
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What Are University Endowments?
University endowments are funds that colleges and universities receive from organizational and individual donors. A university's total endowment is the sum of hundreds, often thousands, of smaller endowments, each of which comes with distinct guidelines for how it can be spent.
Unlike a one-time donation, an endowment represents money the school can tap into over time, sometimes even forever, so long as the funds are replenished and the institution remains open.
Unlike a one-time donation, an endowment represents money the school can tap into over time, sometimes even forever.
For over 300 years, American schools have benefited from endowments. The sources of these funds vary and may include private corporations and government agencies; however, university endowments typically come from individual donors, many of whom are alumni who want to give back to their alma maters for the formative opportunities and relationships they gained there.
Each endowment consists of discrete funds, with stipulations from the donor on how the institution can access its resources. These guidelines usually restrict use to certain schools or colleges within the university, or even to specific academic departments and programs.
The donor may also cap the funds, only allowing trustees to spend a designated amount of money each year.
The 4 Types of University Endowments
Unrestricted endowments are the most straightforward in terms of stipulations. A donor who gives an unrestricted endowment hands over full authority to the university, allowing the school's governing board to use, distribute, invest, and save the assets as it deems appropriate.
When a donor restricts an endowment, they make the initial amount of money granted (that is, the principal) inaccessible. This stipulation means the university must invest the endowed funds since only the returns from these ventures may be used according to the donor's wishes. This ensures the endowment remains perpetually intact.
Term endowments operate with restricted and unrestricted guidelines. The donor restricts access to the principal for a specified period of time, prompting the university to invest the original assets and spend its returns with prudence. When this moratorium lifts, the endowment will have grown substantially, giving the governing board more flexibility over how they can use principal and income amounts.
A quasi endowment functions like a term endowment in that trustees cannot spend the principal for a specified time period. Unlike term endowments, though, the university itself can create quasi endowments, often using assets from unrestricted gifts to meet needs that require increasing levels of support each year. These funds are called "board-designated endowments" or "funds functioning as endowments."
How Are University Endowments Invested and Managed?
University endowments are promises made by donors to students and faculty that the institution will provide specific resources for years to come.
During the 2008 economic collapse and ensuing global financial crisis, some colleges cut their budgets substantially, while others increased their spending in an attempt to avoid having to raise tuition and/or reduce financial aid for students. Without the support of the state or federal government, many higher education institutions increased their endowment spending to pay annual expenditures.
Without the support of the government during the 2008 economic recession, many higher education institutions increased their endowment spending to pay annual expenditures.
However, most governing boards for these endowments ensured that any increases were as short-lived as possible before returning to more frugal spending rates. To guarantee that the institution handles its money with care, donors select trustees who will make responsible decisions and keep the endowment alive for generations.
Trustees maintain the buying power of university endowments by establishing a spending rate their institution must respect. These governing boards also oversee investment so they can continually grow the funds. For example, if a school earns 8% of its annual income by investing, it still has 2% to cover growing costs after exhausting the yearly spending rate (usually around 5% of the total value) and adjusting for inflation (about 1%).
How Are University Endowments Used?
Endowments provide reliable funds, which help colleges and universities achieve extremely high levels of academic quality. Because running a successful school requires paying for many types of labor, universities often rely on endowments to cover the increasing costs of maintaining skilled faculty and staff.
Universities often use endowments to cover the costs of maintaining skilled faculty and staff.
The ongoing nature of endowments means schools can develop long-term goals without fearing that they'll run out of money before completing an important construction project or charitable venture. This flexibility also enables colleges to adapt to changing student needs and pursue innovation by funding research projects and creating new fields of study.
University endowments also create a crucial financial safety net for schools. In the 2007-09 Great Recession, many higher education institutions tapped into their unrestricted and quasi endowments to keep their campuses running. These funds helped sustain key resources for students, faculty, and staff.
What Universities Boast the Largest Endowments?
The table below shows the top 15 university endowment rankings for the 2018 fiscal year.
Before we examine these schools, however, note that even the largest university endowments cover only a small percentage of annual costs. The vast majority of a school's revenue comes from non-endowed gifts, tuition, and government appropriations.
|1||Harvard University||$38.30 billion|
|2||University of Texas system||$30.89 billion|
|3||Yale University||$29.35 billion|
|4||Stanford University||$26.46 billion|
|5||Princeton University||$25.92 billion|
|6||Massachusetts Institute of Technology||$16.53 billion|
|7||University of Pennsylvania||$13.78 billion|
|8||Texas A&M University system||$13.52 billion|
|9||University of Michigan system||$11.90 billion|
|10||Northwestern University||$11.09 billion|
|11||University of California system||$11.01 billion|
|12||Columbia University||$10.87 billion|
|13||University of Notre Dame||$10.73 billion|
|14||Duke University||$8.52 billion|
|15||University of Chicago||$7.93 billion|
Source: The Chronicle of Higher Education
Harvard's endowment sits at the top of the list, totaling nearly $40 billion and consisting of more than 13,000 individual funds. Most of these gifts support undergraduate financial aid, graduate fellowships, and professorships. Additionally, about 80% of the Ivy League institution's endowments are specifically given to one of its 12 schools.
The above rankings may lead you to believe that huge university endowments are common. In reality, only 1.6% of U.S. postsecondary schools — 46 private and 16 public — hold assets exceeding $1 billion. Private colleges and universities generally boast bigger endowments than public institutions, many of which have no endowments at all.
How Do Endowments Benefit Students and Faculty?
As Harvard's endowment spending suggests, these assets allow institutions of higher learning to directly support students through things like scholarships and fellowships. Schools with very large endowments often offer generous financial aid packages in an effort to maintain or improve campus diversity. These awards help first-generation students and other underserved college students, making higher education more equitable and affordable for all.
Schools with very large endowments often offer generous financial aid packages to students.
Endowments enable universities to recruit exceptional faculty, some of whom receive multiple competing offers. The funds can also help close the gender pay gap, which persists even at the most prestigious and progressive institutions. A 2020 study published by the American Association of University Professors found that the average salary for female professors was 81.4% of that for male professors.
Lastly, university endowments bolster academic quality by allowing the institution to develop innovative teaching strategies, fund faculty and student research, and strengthen emerging fields of study. Many universities use endowments to expand and update physical infrastructure as well, such as state-of-the-art laboratories, massive sports stadiums, and dormitories.
Beyond their intended purposes, these institutional achievements help colleges and universities attract future students, faculty, and donors.
Why Schools With Large Endowments Still Raise Tuition
Critics of the U.S. higher education system note that institutions with the largest endowments still raise their tuition every year. These exorbitant prices effectively render a college education inaccessible to everyone but the wealthy few and the handful of underserved students lucky enough to receive full scholarships.
Endowments ultimately make up only a small percentage of a school’s operating budget.
While there is some truth to this claim, it's important to remember that endowments ultimately make up only a small percentage of a school's operating budget. Furthermore, donors typically grant these gifts to specific colleges or academic departments, disallowing universities from using the funds to lower general tuition rates.
Some endowments may actually end up costing the school money in the long run, like when a donor provides funds to cover the cost of building a facility but not enough money to maintain it.
The reality is that American universities see tuition as revenue they need to expand or just stay afloat. Even if an institution were to funnel the majority of its endowments toward lowering tuition, the growing costs of running a higher education institution would quickly outpace income created by investments and eventually deplete the endowment altogether.
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