Colleges use their endowments to fund various expenses, such as financial aid, research, facilities, and faculty salaries. However, endowments are usually invested and managed with a focus on long-term growth, so colleges cannot simply spend all the money in the endowment at once.
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While colleges do use their endowments to fund various expenses such as financial aid, research, facilities, and faculty salaries, spending this money is not as simple as it may seem. Endowments are usually invested and managed with a focus on long-term growth, so colleges cannot simply spend all the money in the endowment at once. Instead, they rely on a portion of the earnings from these investments to meet their ongoing financial needs.
According to a report by the National Association of College and University Business Officers (NACUBO), the average endowment for U.S. colleges and universities in 2019 was $756 million, with the top 10 colleges having endowments of over $30 billion each. These funds are usually invested in a portfolio of stocks, bonds, and other assets with the goal of earning returns that outpace inflation and provide a sustainable source of income for the institution.
Many colleges also have policies in place to protect their endowments from being depleted too quickly. For example, the University of Michigan has a policy that limits the annual spending from its endowment to 5% of the average value over the previous three years. This helps ensure that the endowment can continue to support the institution’s needs in the long term.
As philanthropist and billionaire Warren Buffett once said, “A very rich person should leave his kids enough to do anything but not enough to do nothing.” Similarly, colleges need to balance the need to provide adequate funding for current expenses with the need to preserve their endowments for future generations. While it may be tempting to spend more of these funds in the short term, doing so risks depleting a valuable asset that can provide benefits for many years to come.
Table: Top 10 U.S. Colleges and Universities by Endowment (as of 2020)
| Rank | Institution | Endowment |
|——|—————————————-|———————|
| 1 | Harvard University | $41.9 billion |
| 2 | University of Texas System | $31.9 billion |
| 3 | Yale University | $31.2 billion |
| 4 | Stanford University | $28.9 billion |
| 5 | Princeton University | $26.1 billion |
| 6 | Massachusetts Institute of Technology | $17.4 billion |
| 7 | University of Pennsylvania | $14.9 billion |
| 8 | University of Michigan System | $12.6 billion |
| 9 | Northwestern University | $11 billion |
| 10 | Columbia University in the City of New York | $10.9 billion |
See the answer to “Why don t colleges use their endowments?” in this video
The video discusses how colleges and universities manage their tax-free endowments made up of donations from alumni and other donors and the controversies surrounding their purpose and whether they should be taxed. The investment strategies of prestigious institutions like Harvard, Yale, and Princeton have led to massive growth in their endowments, while critics argue that the institutions should use their wealth to support less wealthy schools and assist low-income students more effectively. The section explores divestment movements that pressure universities to stop investing in certain industries, and the high bar for divestment decisions made by the board of directors. The interconnectedness between board members and hedge funds, as well as the lack of transparency in the world of endowments, is highlighted. The section also addresses the difficulty in identifying top funds in universities’ 990s and concerns over the purpose of endowments, with doubts over whether they will continue to be the best way to ensure higher education has sufficient funds in the future.
Here are some other responses to your query
Why do colleges need endowment?Those schools use their endowments to subsidize financial aid and compensate their faculty generously, explained Eaton. From 2021-22, professors earned an average of almost $266,000 at Princeton, $263,000 at Harvard and $244,000 at Yale, according to data from the American Association of University Professors.
Colleges won’t use their endowments to lower tuition fees or cover expenses because endowments are not savings accounts or rainy day funds. They are restricted by legal agreements and donors’ intent. They can only be used for specific purposes and amounts, and violating them would bring consequences. Moreover, endowments do not have a significant impact on tuition fees. Colleges tend to raise tuition fees or allocate less of their own resources to scholarships as more endowed scholarship money flows in.
It is not. In fact, it is neither strategic for the university, nor respectful of the donors’ intent. It is neither financially responsible/prudent, nor is it permissible. College endowments are not savings accounts earning CD-level interest. Nor are they rainy day funds.
To recap, then, endowment funds come with a lot of strings attached. They are frequently restricted by the purposes they can be used toward and the amount of funding they are allowed to expend. These restrictions are imposed by legal agreements, too. Violating them would bring consequences.
Our research shows that probably on net $100,000 in endowment income leads to a student tuition fee decline of only about $13,000. As more endowed scholarship money flows in, universities typically either raise tuition fees more aggressively, or allocate less of their own resources to scholarships.