Endowment FAQs for Colleges and Universities
What is the purpose of endowments?
- charitable funds that offer a source of stability for colleges and universities.
- critical to the financial health of institutions.
- essential to support colleges and universities as they work to offer high-quality, affordable, accessible education.
- not a single fund, but a compilation of funds given by many donors over time, for specific purposes that cannot always be changed after the gift is made.
Colleges and universities receive returns on their endowment investments each year. Those returns are generally spent at an approximate rate of 4.5% each fiscal year to meet current teaching, learning, and operational needs; any remaining investment returns are generally reinvested into the existing endowment.
How are endowments created?
A college or university's endowment is a collection of hundreds to thousands of separate funds, set up through the generous charitable gifts of donors. An institution’s development office works closely with donors to identify initiatives, projects, or programs of mutual interest. A donor can then set up an endowed fund at the institution to support programs and projects of which they are most passionate.
Endowed funds grow over time through a combination of donations and investment returns, and funds are spent to both meet current needs and the needs of future generations. Most of these endowed funds are known as “restricted” funds that can only be spent in specific situations or under certain conditions.
Why aren’t colleges and universities using their endowments to plug budget gaps?
Endowments are NOT rainy day funds or reserves, nor are they a checking account. Donors typically restrict endowed gifts for specific educational purposes: creating scholarships, supporting professional development, endowing a “chair” position, starting new programs, or building new facilities.
The FY19 CASE Voluntary Support of Education found that 95 percent of new gifts to endowments at colleges and universities were restricted for specific purposes. Institutions are legally bound to uphold these restrictions and cannot redirect endowed funds to close budget gaps.
Since most colleges and universities calculate their annual spending rate on a rolling average or similar formula, endowment spending typically remains stable in the short-term during a downturn. This stable endowment spending provides institutions with flexibility in managing financial challenges. However, colleges and universities cannot spend otherwise restricted endowed funds to meet short-term financial needs.
What happens to endowments during a pandemic or economic crisis?
Endowments are vulnerable to market risks. During the Great Recession, endowments lost an average of 18.7 percent in 2008-09. Because most colleges and universities calculate their annual spending rate on a rolling average or similar formula, endowment spending typically remains stable in the short-term. However, since they are obligated by donors and law to ensure endowed funds meet current and future needs, institutions often must adjust the amount of their spending distributions if a downturn persists.
Additionally, some endowed funds will go “underwater” during a market downturn. Underwater funds are funds that have a value below the value of the original gift. While schools may still spend out of underwater endowments, they ultimately need to get these funds back above water so the funds can support both current and future needs.
Why are colleges and universities asking for donations for student emergency funds?
Most endowed funds at educational institutions are restricted by donors for a particular purpose and meant to support both current and future needs. While many endowed funds support student financial aid/scholarships, many students are in need of more direct, emergency assistance due to the COVID-19 pandemic.
As such, institutions have created dedicated student emergency funds to help students who are struggling financially right now. Gifts made to these funds are for current use, which means institutions can use them immediately to help struggling students.