What is an Endowment?

An endowment is a tax-exempt pool of donated funds managed by a university foundation and invested in stocks, bonds, real estate, private equity, and alternative assets. These funds generate investment returns and are used to fund scholarships, faculty salaries, research, and infrastructure. The goal is for annual investment returns to exceed annual spending, while continuous fundraising efforts ensure the endowment grows indefinitely. 

Universities charge their endowments annual fees for overhead, administrative expenses, and investment management fees, while the remainder is reinvested. Because endowments are tax-exempt, they do not pay taxes on investment earnings.

College & University Endowments: Q&A

Q: How are endowments funded?

A: Endowments are funded by donations from a variety of sources, including philanthropists, alumni, corporations, and even sovereign wealth funds controlled by foreign governments. These funds are invested in stocks, bonds, real estate, and alternative assets to generate returns.

Many donations come with restrictions, meaning they must be used for specific items or programs as set in a negotiated donor agreement.

Q: Can universities spend all their endowment money?

A: No, most endowment funds have spending restrictions set by donors, making them unavailable for general use. Even unrestricted funds are subject to institutional policies that typically limit annual spending to 4–5% to maintain long-term growth.

Q: Why do wealthy universities still charge high tuition?

A: Even universities with multi-billion-dollar endowments rely heavily on tuition revenue. Many large endowments have strict restrictions and cannot be used to cover general operational costs. Instead of increasing endowment spending, most universities continue to raise tuition and assess student fees to fund new programs, faculty, and infrastructure.

Q: Why do universities with large endowments receive federal funding?

A: Federal funding often supports research, financial aid, and public initiatives. Universities with large endowments may still qualify based on their research contributions or student aid programs.

Q: What is the role of foreign governments in U.S. university endowments?

A: Foreign governments often fund university programs, faculty positions, and research initiatives through donations that are typically restricted. Some donations have raised concerns about foreign influence on academic programs. These donations typically fund specific initiatives rather than being added to the general endowment, but their influence over faculty hiring and research priorities remains controversial.

Example: China, Saudi Arabia, and Qatar have donated millions to elite U.S. universities, sparking debates over intellectual property security, academic freedom, and potential political influence.

Q: Who manages these endowments and what is the cost for that?

Large university foundations have in-house investment teams, while smaller institutions often rely on Outsourced Chief Investment Officers (OCIOs) or external asset managers. 

Universities typically pay between 0.35% and 2% of their endowment’s asset value annually in investment management fees and administrative costs, depending on the size and complexity of the fund. Some firms also charge incentive fees based on performance.

Harvard University, which has one of the largest endowments, spent $480 million on investment management fees in 2020.

Q: Where can I learn about a specific university’s endowment size?

A: Universities typically report endowment figures in annual financial reports. You can also check the National Association of College and University Business Officers (NACUBO) rankings or your school’s website.

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Why should you care?

• Tuition Impact – Schools with large endowments may offer more financial aid and scholarships, but often continue raising tuition.
• Resource Availability – A well-funded school can afford better facilities, faculty, and programs, but may prioritize long-term investments over affordability.
• Long-Term Stability – Strong endowments ensure that the university can withstand economic downturns, but critics argue they prioritize wealth preservation over student costs.

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Why do colleges with huge endowments still receive federal and state funding?

 There are several reasons:

1. Funding Specific Programs – Federal funds often support research, student aid (like Pell Grants), and public service initiatives rather than general university operations.
2. Student Financial Aid – Many federal grants and loans go directly to students, regardless of a university’s endowment size.
3. Research & Innovation – Universities conduct federally funded research in science, medicine, and technology that should benefit society as a whole.
4. Public Mission – Even private universities with large endowments may serve public interests and contribute to national priorities, justifying government investment.
5. Restricted Endowment Use – Much of a university’s endowment is tied to donor restrictions and cannot be freely spent on general expenses.

What are common criticisms of college and university endowments?

1. Lack of Transparency – Critics argue that universities are not always clear about how endowment funds are spent, making it difficult to assess whether they directly benefit students. University foundations are generally 501(c)3 non-profit entities, meaning they are exempt from Freedom of Information Act (FOIA) requests and public records disclosures. This lack of transparency makes it harder to evaluate whether universities are using their endowment wealth in ways that align with their public commitments and educational missions.   
2. Tuition Prices Remain High – Despite large endowments, many institutions continue to raise tuition instead of using endowment funds to reduce costs for students. While some schools use endowment funds for scholarships, this spending is often limited, and the overall cost burden on students continues to increase.
3. Student Fees Instead of Endowment Funds – Universities frequently charge students additional fees to fund program expansions, facility upgrades, and capital projects rather than using endowment funds. For example, if a university constructs a new building for an expanding academic program, it may initially cover the cost but require the program to repay the expense over several years using student fees. This approach shifts costs onto students while large endowment funds remain largely untouched, leading to concerns about misaligned financial priorities.
4. Limited Spending – Critics argue that while universities justify limited spending as prudent financial management, it prioritizes endowment growth over affordability, leaving students to bear the rising costs of tuition and fees. Most universities spend only 4–5% of their endowment annually, despite growing multi-billion-dollar reserves. Universities claim this ensures long-term financial stability, but critics question whether such cautious spending is necessary given the vast resources available. Instead of tapping into their large reserves to ease financial burdens on students, institutions often choose to increase tuition and student fees, exacerbating affordability concerns.
5. Tax Breaks & Public Funding – Universities with massive endowments benefit from tax-exempt status and still receive federal and state funding, which some argue is unnecessary when they already have billions in assets.
6. Fairness Issues – The richest universities, like Harvard and Yale, have multi-billion-dollar endowments, while smaller or public universities struggle for funding, widening the gap in educational resources.

Final Thoughts

University endowments provide long-term financial stability, but critics argue they prioritize wealth accumulation over student affordability. With rising tuition, ongoing fundraising, and tax exemptions, many question whether elite universities should be required to spend more of their endowment wealth to benefit students and taxpayers.