Understanding College and University Endowments
Understanding College and
University Endowments
Answers to questions frequently asked by students, faculty, alumni, journalists,
public ofcials, and others interested in the nancial circumstances of U.S. colleges
and universities.
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American
Council on
Education
1
Understanding College and University Endowments
What is an endowment?
An endowment is an aggregation of assets invested by a college or university to support its educational and re-
search mission in perpetuity. It represents a compact between a donor and an institution and links past, current,
and future generations. ese gifts also allow an institution to make commitments far into the future, knowing
that resources to meet those commitments will continue to be available.
An institution’s endowment actually comprises hundreds or thousands of individual donations. Endowments
allow donors to transfer their private dollars to public purposes with the assurance that their gifts will serve these
purposes for as long as the institution continues to exist.
Endowments serve institutions and the public by:
Providing stability. College and university revenues uctuate over time with changes in enrollment (tuition),
donor interest (gifts), and public support (largely state and federal). Although endowment earnings also vary
with changes in nancial markets and investment strategies, most institutions follow prudent guidelines that
are intended to buer economic uctuations and to produce a relatively stable stream of income. Because
the endowment principal is not spent, the interest generated by endowment earnings supports institutional
priorities year after year. is stability is especially important for activities that cannot readily be started and
stopped, or for which uctuating levels of support could be costly or debilitating. Endowments frequently
support student aid, faculty positions, innovative academic programs, medical research, and libraries.
Leveraging other sources of revenue. Institutions have dramatically increased their own student aid expen-
ditures in recent years, and endowments have enabled institutions to respond more fully to changing demo-
graphics and families’ nancial need. It is not surprising that the colleges and universities with the largest
endowments are the ones most likely to oer need-blind admission (admitting students without regard to
nancial circumstances and then providing enough nancial aid to enable them to attend). At the same time,
endowments help institutions provide nancial aid to students who cannot aord full tuition. An endowment
also allows a college or university to provide a higher level of quality of service at a lower price than would
otherwise be possible. is has been especially important in recent years, particularly for publicly supported
institutions that have experienced signicant cuts in state support. Without endowments or other private gifts,
institutions would have had to cut back even further on their programs, increase tuition and fees even further,
and/or obtain additional public funding to maintain current programs at current prices.
Encouraging innovation and exibility. An endowment enables faculty and students to conduct innovative
research, explore new academic elds, apply new technologies, and develop new teaching methods even if
funding is not readily available from other sources, including tuition, gifts, or grants. Such innovation and
exibility has led to entirely new programs and to important discoveries in science, medicine, education, and
other elds.
Allowing a longer time horizon. Unlike gifts expended upon receipt, an endowed gift keeps giving over
time. Endowed institutions can plan strategically to use a more reliable stream of earnings to strengthen and
enhance the quality of their programs, even if some of their goals will take many years to achieve. By making
endowed gifts, alumni and others take responsibility for ensuring the long-term well-being of colleges and
universities. eir gifts help enable future generations of students to benet from a higher quality of education
and allow these institutions to make even greater contributions to the public good. Endowments ensure that
the education oered today at a particular college or university will have the same value 25 or 50 years from
now.
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Understanding College and University Endowments
Who has endowments and in what amounts?
Although the concept of endowment originated in England in the fteenth and sixteenth centuries, the develop-
ment of endowments for higher education institutions is a decidedly American phenomenon. Endowments have
supported U.S. colleges and universities for more than 300 years. Many other kinds of institutions in this country
also maintain endowments, including churches, hospitals, museums, private secondary schools, and cultural and
performing arts groups.
Endowments are frequently described as if they are a single fund, when in fact, they are an aggregation of discrete
funds, each with its own stipulations about the purposes for which it can be used. e aggregate size of the insti-
tution’s endowment may be misleading, especially at institutions with graduate and professional schools because
much of the endowment income may not be available to support undergraduate programs.
While public attention focuses primarily on the relatively small number of colleges and universities with large
endowments, most colleges and universities have only modest endowments or none at all. Although some public
universities’ endowments rank among the largest, most public institutions have only nominal endowments or
none at all (although they may receive signicant state subsidies, which typically are not available to private col-
leges and universities).
In this report, we focused our analysis only on public and private nonprot four-year degree-granting institutions
with reported endowment data. Calculations using data from the National Center for Education Statistics (NCES)
show that by the end of scal year 2018, 25 percent of private nonprot four-year colleges and universities and
23 percent of public four-year institutions had endowments of less than $10 million. e median endowment at
private nonprot four-year colleges and universities is roughly $37.1 million, which at a typical spending rate of
about 4 to 5 percent would support an annual expenditure of between $1,484,000 and $1,855,000. is typical
spending amount represents 5.1 to 6.4 percent of the median total expenditures of a nonprot four-year institu-
tion ($29.2 million). By contrast, while the median endowment at public four-year institutions is comparable at
approximately $35.4 million, a spending rate that would similarly support an annual expenditure of $1,416,000
and $1,770,000 represents only 1 to 1.2 percent of their median total expenditures ($143.6 million).
Of the roughly 1,300 private nonprot four-year institutions with reported endowment data, 546—or about 43
percent—had endowments over $50 million. Similarly, of the nation’s roughly 700 public four-year institutions
with reported endowment data, 282—or about 40 percent—had endowments over $50 million. Overall, only 104
institutions (5 percent of public and private four-year colleges and universities with reported data) had endow-
ments exceeding $1 billion. Of these, 64 were private nonprot and 40 were public.
1
1 Integrated Postsecondary Education Data System (IPEDS). https://nces.ed.gov/ipeds/datacenter/
InstitutionByGroup.aspx.
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Understanding College and University Endowments
FIGURE 1. FY 2018 ENDOWMENTS FOR PUBLIC AND PRIVATE NONPROFIT FOUR-YEAR INSTITUTIONS
30%
25%
20%
15%
10%
5%
0
Up to $10M $10–$25M $25–$50M $50–$100M $100–$500M $500M–$1B Over $1B
23%
25%
19%
16%
18%
15%
13%
14%
16%
19%
5%
4%
6%
5%
Public Four-Years
Private Nonprofit Four-Years
Source: Integrated Postsecondary Education Data System (IPEDS)
Whatever its size, an endowment can provide critical support for current programs and the promise of consistent
support into the future. But even the largest endowments can only supplement—not replace—annual funding
from tuition, non-endowment gifts, federal grants, and, especially in the case of public institutions, state appro-
priations. Most institutions can cover only very modest fractions of their annual budgets with earnings from their
endowments.
How is an endowment created?
An endowment typically includes funds given to an institution by donors who have stipulated as a condition of
the gift that its principal may not be spent, and who expect that its value will increase over time through a respon-
sible balance between expenditure and reinvestment of its earnings. In many cases, the donor restricts the income
to one or more purposes; if so, the institution must spend the income only for those purposes. In other cases, the
institution is given discretion by the donor to select the educational purposes to be served, but it is still restricted
to spending just the income.
Occasionally, colleges and universities receive gifts from donors who permit the spending of principal, but the
institution’s governing board decides for reasons of prudence and stability to treat the gift as an endowment. ese
may be referred to as “funds functioning as endowment.” Institutions typically use these funds to meet long-term
obligations that require increasing levels of support year after year, such as professorships or scholarships. For
example, a donor may contribute $1 million to support a university’s history department, but with no further
stipulation as to how the money is to be spent. e university could decide to spend all $1 million the following
year to augment faculty salaries, support graduate students, conduct research, add library books, or perhaps make
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Understanding College and University Endowments
physical repairs to oces, classrooms, or laboratories. Each of these expenditures would address important needs,
but at the end of that year there would be no funds remaining to sustain these spending levels or to help meet the
many continuing needs of the department.
Alternatively, the university could invest the $1 million so that its value would be preserved over time and its
earnings year after year would be available to the department to meet its continuing commitments, in good times
and bad. Assuming the 7.5 percent 10-year average investment rate of return for scal year 2020, according to the
annual endowment study by the National Association of College and University Business Ocers (NACUBO)
and TIAA, this investment would generate approximately $75,000 of spendable income each year at most colleges
and universities, increasing annually at roughly the rate of ination.
2
How do institutions with endowments balance the
present and the future?
Endowments originated to establish a pact between generations: a promise from past and current donors to future
students and faculty that the institution will sustain certain commitments over time. In the face of the interna-
tional economic crisis following the Great Recession in 2008, most institutions made signicant budget cuts, and
in some cases, the dicult choice to temporarily increase their spending rate above normal levels in order to help
moderate higher tuition increases, maintain or increase student aid, and support the quality of their programs.
In 2020, while the COVID-19 downturn in nancial markets lasted for only a few months and most endowments
rebounded by the end of the scal year, a related nancial crisis has taken place. Beginning in March of that year,
the pandemic forced colleges and universities to rapidly close their campuses and implement a wholesale shift to
online instruction, causing massive disruption and enormous unforeseen expenses and revenue losses. As they
planned for and began the 2020–21 academic year, colleges and universities spent millions to purchase personal
protection equipment and cleaning supplies, to modify facilities to de-densify their campuses, and to establish
testing plans and vendor relationships to implement those plans. ACE and the major higher education associations
calculated that the nancial impact of the pandemic on students and institutions would total at least $120 billion.
3
No doubt most institutions temporarily increased their endowment spending rates as a way to help mitigate some
of these enormous costs. NACUBO found that in the scal year 2020, 70 percent of institutions had increased
their endowment spending from the previous year, with an average increase of about $3.3 million.
ere is always a temptation to increase spending to meet the very real needs of today’s students and faculty. But
institutional leaders understand that this generation could not be supported at today’s level of quality if earlier
generations had not had the discipline to sustain the purchasing power of their endowments. Similarly, future gen-
erations depend on the current one to balance the claims of the future against the claims of the present. In those
instances where institutions temporarily increase their endowment spending rate, it is generally for a short period,
and then the more conservative rate is reinstated.
2 2020 NACUBO-TIAA Study of Endowments (public tables). https://www.nacubo.org/Research/2020/Public-
NTSE-Tables.
3 Letter to House Speaker Nancy Pelosi and Minority Leader Kevin McCarthy. American Council
on Education, Sept. 25, 2020. https://www.acenet.edu/Documents/Letter-House-Fall-COVID-
Supplemental-092520.pdf.
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Understanding College and University Endowments
As duciaries, trustees have a legal and moral obligation to donors, many long since deceased, who intended
that their gifts would support not just one generation, but succeeding generations indenitely. Many states have
statutes, modeled on the Uniform Prudent Management of Institutional Funds Act (UPMIFA), that specically
require trustees to consider both the “long and short term needs of the institution” and its “present and anticipated
nancial requirements.”
4
To keep pace with the rising costs of education, research, and campus life, trustees must
reinvest some of each year’s earnings and add new gifts as well. Fifty years ago, a donor wishing to endow a profes-
sorship at a major university could have done so with a gift of about $700,000.
at amount of principal in 1970 would have generated sucient income to pay the salary of a distinguished pro-
fessor. But if all of the income generated over the years by that principal had been spent, leaving only the original
$700,000, its earnings now would not come close to supporting a professor’s salary.
Colleges and universities strive to spend as much as possible on the current generation without diminishing
resources available for future generations. at is, they manage endowments to ensure that a fund supporting a
faculty position today will still be able to support a faculty position 20, 30, or even 50 years from now. To achieve
these two goals, trustees of colleges and universities have established spending policies that allow their institutions
to spend endowment earnings each year equal to about 4 to 5 percent of the value of their endowment. Given the
uncertainty about long-term investment returns, these spending models assume that endowment value will grow,
on average, about 7 to 8 percent over the long term. (Figure 2 illustrates the signicant changes in average 10-year
returns in recent years.) In addition, the spending models reect long-term ination of 1 to 3 percent, on average,
and the need to reserve funds for future program improvements.
College and university costs can be expected to rise faster than the Consumer Price Index (CPI) because of the
labor-intensive nature of the educational process. In addition, the expanded use of technology in teaching, the
rapid rise in cost of libraries, and the dramatic advances in research all call for increased investment in academic
programs well above ination.
For institutions with larger endowments, endowment revenue can be the largest single source of operating reve-
nue. Given that investment returns are volatile (Figure 2), institutions use “smoothing rules” that seek to mitigate
variations in endowment revenue. One smoothing rule is to apply the spending formula to the three-year roll-
ing average of endowment. Because colleges and universities have large xed costs such as salaries and benets,
smoothing rules provide predictability in campus budgets. In addition, smoothing rules are naturally counter-
cyclical—when investment returns are good, spending is a smaller share of total endowment value, and during
leaner times, spending is a larger share.
To appreciate the importance of preserving the long-term strength of endowments, it is useful to compare the
period of 2002–10 with 2011–20:
5
• e scal year ending June 30, 2009, saw the lowest one-year average return (net of fees) for all college
and university endowments over the past 20 years, with -18.7 percent. Similarly, the 10-year average
annual return was at its lowest in 2010 (2001 through 2010) at 3.4 percent. e preceding 10-year
average annual returns were signicantly higher, with returns as high as 8.6 to 9.8 percent seen consis-
tently between 2002 and 2007.
4 Uniform Prudent Management of Institutional Funds Act. Drafted by the National Conference of
Commissioners on Uniform State Laws (July 2006). https://www.uniformlaws.org/HigherLogic/System/
DownloadDocumentFile.ashx?DocumentFileKey=d7b95667-ae72-0a3f-c293cd8621ad1e44&forceDialog=0.
5 2020 NACUBO-TIAA Study of Endowments (public tables). https://www.nacubo.org/Research/2020/Public-
NTSE-Tables.
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Understanding College and University Endowments
• Since 2010, there have been signicant uctuations in average one-year endowment returns, with some
years as high as 19.2 percent (in 2011) and 15.5 percent (in 2015) interrupted by very minimum average
returns such as -0.3 percent (in 2012) and -1.9 percent (in 2016).
• In the scal year ending June 30, 2020, the average one-year annual return of all college and university
endowments was 1.8 percent. e 10-year average annual return from 2011 through 2020 was 7.5
percent.
FIGURE 2. FYs 2002 TO 2020 10-YEAR AVERAGE ENDOWMENT RETURNS
0
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
7.5%
Source: 2020 NACUBO-TIAA Study of Endowments
Every year, some endowments signicantly outperform the averages, while others lag behind or may even lose
value, depending on their particular investments. Just like individuals, institutions need reserves to protect against
unexpected expenses such as future economic downturns or declines in enrollment, donations, or government
support, and to pay for unanticipated costs such as those stemming from the COVID-19 crisis, repairs or renova-
tions to comply with new safety standards, or to recover from natural disasters such as hurricanes or earthquakes.
Funds functioning as endowment and other capital assets permit an institution to cover its decits and pay its bills
without having to take hasty actions that might seriously damage its quality or nancial capacity. When institu-
tions do have to spend principal, they reduce the size of their reserve and the future income that their investments
will be able to generate. is, in turn, reduces the stream of steady, reliable income that will be available to make
future commitments and enhance the quality of their programs. e challenge is to nd an appropriate balance:
not being so cautious that important current needs are unmet, but being cautious enough so that the institution is
prepared to weather serious reversals in the national economy.
How are endowments invested?
Before the twentieth century, real estate was a primary endowment asset for educational institutions. Today’s en-
dowments are invested most heavily in U.S. and non-U.S. stocks, bonds, real estate, and other illiquid assets such
as hedge funds. One of the most important responsibilities of trustees is to oversee the management and allocation
of the institution’s assets. Trustees are legally obligated to be prudent in their investment management, but they
also should make every eort to achieve as substantial a return as prudence will allow.
As the investment world has become more sophisticated in recent years, nontraditional investments such as com-
mercial real estate, venture capital, hedge funds, gas and other natural resources, and other kinds of funds have
7
Understanding College and University Endowments
received increased attention. According to NACUBO,
6
traditional stocks, bonds, and cash investments accounted
for about 87 percent of endowment assets at public and private nonprot institutions in scal year 2002. By 2020
this percentage had fallen to 72 percent, with the remaining 28 percent of endowment investments distributed
between private equity (21 percent) and natural resources and other “real” assets (7 percent).
FIGURE 3. FY 2020 ENDOWMENT ASSET ALLOCATION
Traditional Stocks, Bonds, & Cash
Private Equity
Natural Resources & Other "Real" Assets
71.8%
21.0%
7.2%
Source: 2020 NACUBO-TIAA Study of Endowments
Are endowments taxed?
For educational and many other charitable institutions, most endowment investments yield earnings that are gen-
erally exempt from taxation. is exemption dates back to the earliest days of the income tax in this country, and
recognizes the public purposes that these institutions serve. Because of this exemption, donors know that institu-
tions will be able to use all of the earnings on their gifts to support the purposes the donors wish to serve. e tax
exemption on endowment earnings is an important way in which society contributes to the support of U.S. higher
education.
However, the Tax Cuts and Jobs Act, the major tax reform legislation enacted in December 2017, included an
unprecedented new tax on private nonprot colleges and universities. Institutions enrolling at least 500 tuition-
paying students that have assets of at least $500,000 per student must now pay a tax of 1.4 percent on their net
investment income. On October 15, 2020, the IRS issued nal regulations to provide a framework for institutions
to determine whether they are subject to the tax and if so, how they can calculate the amount of the tax they owe.
7
6 2020 NACUBO-TIAA Study of Endowments (public tables). https://www.nacubo.org/Research/2020/Public-
NTSE-Tables.
7 Guidance on the Determination of the Section 4968 Excise Tax Applicable to Certain Colleges and
Universities. Federal Register (Vol. 85, No. 200, Oct. 15, 2020). https://www.govinfo.gov/content/pkg/
FR-2020-10-15/pdf/2020-20933.pdf.
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Understanding College and University Endowments
Opposed by the higher education community, the so-called “endowment tax” is highly controversial, with bipar-
tisan eorts in Congress to repeal it. As enacted, the excise tax makes no eort to create incentives for institutions
to spend their endowments in certain ways, such as on student nancial aid or other initiatives to address college
costs. Instead, the revenue generated by the excise tax, projected to be about $200 million per year, will simply
go to the federal government to be used for any purpose. e tax imposes a new cost on these institutions both
in terms of funds spent on the tax itself as well as the costs incurred to ensure compliance with the complicated
regulations.
How are endowments managed?
Each institution adopts its own strategies and rules to maximize its endowment’s capacity to support both current
spending and future needs. Some institutions manage their endowments with their own sta; others rely on their
trustees, contract with professional managers, or use a combination of approaches. Some institutions seek to maxi-
mize income, while others focus on total return (dened as income plus capital appreciation).
Many institutions adopt formal spending rules that seek: (1) to ensure a growing stream of revenues from the
endowment to support each year’s expenditures; (2) to ensure sucient reinvestment so that the value of the
endowment is maintained relative to rising costs over time; and (3) to permit greater predictability in budgeting
by smoothing out year-by-year uctuations in earnings. For many institutions, this last strategy has proven to be
preferable to expanding the institution’s budget in response to higher returns, only to have to make substantial
spending cuts in a later year to accommodate a more typical—or an unusually low—level of income.
Spending rules are the planning mechanism through which institutions seek to deliver a maximum quantity and
quality of educational services today without eroding their capacity to support equivalent educational services in
the future.
How are endowments used?
For private nonprot colleges and universities—and increasingly for public institutions—endowments provide
stability, exibility, and a degree of condence for the future. ey enable institutions to aim higher and to achieve
their educational and charitable purposes more eectively. ese benets, both to the institutions and to those
they serve, justify the eort necessary to build and maintain endowments. For students, their families, and society
generally, endowments allow institutions to deliver greater value and attain a higher level of quality than would
otherwise be possible in their teaching and research. e reliable long-term support from an endowment enables
institutions to increase student nancial aid, make commitments to senior faculty, initiate pioneering research,
develop stronger teaching programs, invest in new technologies, and maintain their libraries, laboratories, and
other physical assets.
According to NACUBO, institutions are overwhelmingly spending their endowments on supporting their stu-
dents; for scal year 2020, 65 percent of spending was on student nancial aid and academic programs. Even in
dicult nancial times, an endowment can sustain an institution’s teaching and research and allow it to provide
essential support to its faculty and students.
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Understanding College and University Endowments
FIGURE 4. FY 2020 ENDOWMENT SPENDING
Student Financial Aid
Faculty Positions
Campus Operations
Academic Programs
Other Purposes
48.0%
11.0%
17.0%
7.0%
17.0%
Source: 2020 NACUBO-TIAA Study of Endowments
Endowments also allow institutions to engage in long-range planning with condence that they will have the
resources necessary to complete their most important projects. Institutions need long horizons to make capital
improvements, build strengths in emerging academic elds, and adapt to the changing needs and interests of their
students and the broader society. Finally, endowments stimulate contributions from donors who want to be sure
that their gifts will benet an institution’s educational purposes in perpetuity. is charitable impulse to commit
private dollars to support of valued public purposes continues to create and strengthen endowments for the benet
of this and future generations.
Why do institutions with large endowments keep
increasing tuition?
Institutions with endowments use them, along with other resources, to oer programs of greater quality than
either the endowed funds or the institution’s other resources could support by themselves. In many cases, donors
explicitly direct their gifts toward expenditures that expand or enhance programs, and may even make the institu-
tion more expensive to operate. It is not uncommon for a donor to pay for the construction of a building but not
for its maintenance or operation, or to seek assurance that the institution will not substitute endowment dollars
for other funds. At the best-endowed institutions, endowment income typically represents the single largest source
of revenue of the overall operating budget.
Tuition plays an important role in meeting other costs. At the same time, endowments help institutions provide
nancial aid to students who cannot aord full tuition. is is evident when comparing the net prices of the
wealthiest private nonprot four-year institutions to that of the national average. Of the top 10 highest endowed
private institutions, the calculated 2018–19 average net price was approximately $22,000, about 70 percent less
than the posted term bill (of $73,000).
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Understanding College and University Endowments
TABLE 1. NET PRICES OF THE WEALTHIEST PRIVATE NONPROFIT FOUR-YEAR INSTITUTIONS
Percent Awarded Any
Type of Grant Aid
Average Net
Price
Posted Price
Calculated
Discount Rate
National Private Four-Year Average 87% $26,440 $51,874 49%
Top 10 Private Four-Years 56% $21,978 $73,033 70%
Top 25 Private Four-Years 54% $25,455 $72,632 65%
All Private Four-Years over $1 Billion 63% $27,090 $68,789 61%
Note: All data is in reference to only full-time, rst-time undergraduate students.
Sources: Integrated Postsecondary Education Data System (IPEDS), 2018–19 NCES Digest of Education Statistics
Given the highly competitive nature of these top endowed institutions, some with acceptance rates in the single
digits, they generally choose to provide signicant nancial aid as a matter of policy to benet low- and middle-
income students, made possible at least in part by the resources in their endowments. If institutions spent addi-
tional endowment earnings or principal rather than increasing tuition thereby depleting the purchasing power of
the endowment over time, tuition would have to rise more sharply in the future as endowment earnings declined,
and there would be less funding available for nancial aid.
Why do institutions conduct campaigns to
increase an endowment rather than raise funds for
immediate needs, such as student aid or building
renovations?
Most institutions do both. ey raise annual funds to help meet immediate needs, but they also raise endowments
to help meet future needs. Endowed institutions meet the needs of today with earnings from gifts they were given
in the past, and the endowed funds they raise now will help ensure that they can continue to educate students and
support faculty research even when government budgets are tight or economic downturns reduce annual voluntary
contributions.
Why should a donor give to a college or university
with a large endowment as opposed to a charity in
greater need of funds?
Most colleges and universities hope that donors will do both. Institutions typically encourage students, and in
some cases alumni and others, to participate in community service. But the costs of high-quality education and
research are growing rapidly as colleges and universities expand nancial aid programs to support students—
11
Understanding College and University Endowments
particularly from low-income backgrounds, thereby providing social mobility—pursue the very best faculty, adopt
new technologies, and try to keep pace with the expansion of knowledge. Institutions need additional resources if
they are to serve their public purposes eectively and remain world leaders in their elds.
Why shouldn’t colleges and universities be
required to spend a minimum amount from their
endowments each year, much as foundations are
required to meet minimum payout standards?
Foundations and universities are very dierent kinds of institutions. In the case of a foundation, the public has
an interest in ensuring that the foundation is adequately serving its charitable purposes in return for the tax
advantages granted to the donor, and the most eective way to ensure this may be through a minimum payout
requirement. In contrast, funds donated to college and university endowments are given for the express purpose of
supporting designated educational or scholarly activities over a long period of time. ere are many constituencies
that play a role in ensuring that these dollars are spent for their intended purposes, including students, faculty,
alumni, local residents, and government agencies. If anything, the pressures on colleges and universities push in
the direction of spending more of the endowment’s earnings on current purposes, to the potential detriment of
sustaining the purchasing power of the endowment for a future in which the costs of high-quality education and
research are likely to be even greater.
12
Understanding College and University Endowments
Endowment fact sheet
SIZE
• Twenty-ve percent of private four-year and 23 percent of public four-year institutions have endowments
of less than $10 million.
• e median endowment at private four-year colleges and universities is roughly $37.1 million, which at
a typical spending rate would support an annual expenditure of between $1,484,000 and $1,855,000.
e median endowment at public four-year institutions is roughly $35.4 million, which would support
$1,416,000 to $1,770,000 of annual expenditure. Such typical spending amounts represent 5.1–6.4
percent of the median total expenditures of nonprot four-year institutions ($29.2 million), while only
1.0–1.2 percent of expenditures at public four-year institutions ($143.6 million).
• Of the nation’s roughly 1,300 private nonprot four-year institutions that reported data, about 43 percent
had endowments over $50 million. Similarly, of the nation’s roughly 700 public four-year institutions
with reported data, about 40 percent had endowments over $50 million.
• Five percent (104) of the public and private nonprot four-year colleges and universities with reported
data had endowments exceeding $1 billion, 64 private and 40 public.
• In addition to colleges and universities, other institutions with endowments include churches, hospitals,
museums, private secondary schools, and performing arts groups.
COMPOSITION
• An endowment typically includes many dierent funds.
• Some endowments are given with the stipulation that the principal will never be spent. In many of these
cases, the donor restricts the income to one or several purposes, programs, or departments. Especially at
research universities, a signicant fraction of the endowment may not be available to support undergradu-
ate programs.
• In other cases, the institution can select the educational purposes the gift will serve, but it can still only
spend income.
• Sometimes donors permit the spending of principal, but the institution decides to treat the gift as endow-
ment so it can continue to yield income in support of long-term obligations. ese are called “funds
functioning as endowment.”
SPENDING RULES
• Most college and university governing boards adopt endowment spending policies that are designed to
maintain a smooth spending course while achieving intergenerational equity. e principle of intergen-
erational equity ensures that future generations of students and faculty receive at least the same level of
support from an institution’s endowment as the current generation enjoys.
• Typical spending policies aim to prevent weak investment returns from forcing commensurate decreases
in spending. When investment returns are robust, smoothing rules help ensure that any increased spend-
ing can be sustained into the future.
• Institutions, on average, seek endowment growth (dividends plus appreciation) of 7 to 8 percent a year to
keep up with ination, cover investment management costs, and approach a 4 to 5 percent spending rate.
13
Understanding College and University Endowments
• Dierent assumptions about the long-term rates of increase in costs or in the value of the endowment
might yield a dierent rule. In periods with consistently strong nancial markets, institutions may go
beyond their rules and make additional upward adjustments in their spending of endowment income,
while also creating additional reserves for those years when markets fall short of their long-term targets.
• In scal year 2020, institutions allocated 72 percent of endowment assets to traditional stocks, bonds, and
cash investments, 21 percent to private equity, 7 percent to natural and other “real” assets.
• Over the past decade (2011–20), the average return for college and university endowments was 7.5
percent. In 2020, the average was 1.8 percent.
• Over the past decade (2011–20), the average spending rate for college and university endowments was 4.6
percent; in 2020, the institutions with the largest endowments (over $1 billion) spent an average of 4.5
percent.
• In scal year 2020, 70 percent of institutions increased their endowment spending from the previous year,
with an average increase of about $3.3 million.
BENEFITS TO SOCIETY
• Endowments allow institutions to deliver greater value and attain higher levels of quality than would
otherwise be possible.
• Reliable long-term support from an endowment enables institutions to increase student aid, make
commitments to senior faculty, initiate pioneering research, develop stronger teaching programs, invest in
new technologies, and maintain their libraries, laboratories, and other physical assets.
• Even in dicult nancial times, endowments can sustain institutions’ teaching and research and allow
them to provide essential support for faculty and students.
• Endowments also allow institutions to engage in long-range planning with condence that they will have
the resources necessary to complete their most important projects.
• Institutions need long time horizons to make capital improvements, build strengths in emerging academic
elds, and adapt to the changing needs and interests of their students and the broader society.
• In scal year 2020, institutions spent 48 percent of endowments on student nancial aid, 17 percent on
academic programs, 11 percent on endowment faculty positions, 7 percent on campus operations, and 17
percent on other purposes.
ENDOWMENT EXCISE TAX
• e Tax Cuts and Jobs Act, the major tax reform legislation enacted in December 2017, included an
unprecedented new tax on private nonprot colleges and universities.
• Institutions enrolling at least 500 tuition-paying students that have assets of at least $500,000 per student
are now subject to a tax of 1.4 percent on their net investment income.
• Opposed by the higher education community, the excise tax does nothing to incentivize endowment
spending that benets students, research, or other aspects of institutional educational missions. Instead,
the revenue generated by the excise tax, projected to be about $200 million per year, will simply go to the
federal government to be used for any purpose.
• e tax imposes a new cost on the institutions subject to the statutory framework both in terms of funds
spent on the tax itself as well as the costs incurred to ensure compliance with complicated IRS regulations.
