Demystifying University Endowments

As universities across the country face the threat of federal funding cuts, people wonder: "Why don't they just use their multi-million-dollar endowments to make up the difference?" While the question might seem logical, it fundamentally misunderstands what university endowments are - and, equally important, what they are not.

Endowments are not savings accounts or emergency reserves designed for immediate financial shortfalls. Instead, they are long-term investment vehicles intended to generate sustainable income that supports a university's mission over generations. Endowments grow through careful investments, providing ongoing revenue via interest, dividends, and capital appreciation. This steady income helps universities fund essential activities such as student scholarships, research initiatives, faculty salaries, and infrastructure maintenance year after year.

Critically, most endowment funds come with strict donor-imposed restrictions. Donors who contribute to an endowment often specify precisely how their money must be spent - whether for a particular scholarship, research project, academic department, or facility. Universities are legally obligated to honor these restrictions, guided by laws designed to protect donor intent and ensure prudent financial management. For example, approximately 80% of Harvard's substantial $53 billion endowment is bound by donor stipulations, greatly restricting how the University can use these funds, especially in crises.

Moreover, prudent financial stewardship requires universities to limit annual endowment spending to 3-6% of the total value. Exceeding this prudent spending threshold—particularly in response to sudden funding shortfalls - puts long-term financial stability at significant risk. The economic crisis 2008 provided clear lessons: universities that overspent their endowments experienced severe financial distress, leading to layoffs, halted academic programs, and enduring financial harm.

Federal funding cuts pose significant operational challenges for universities, often leading to hiring freezes, budget cuts, and reduced student admissions. Recent examples from institutions such as MIT, Northwestern, and North Carolina State illustrate these painful choices, directly impacting the quality and breadth of educational and research opportunities available.

Using endowments to fill short-term financial gaps might seem appealing. However, aggressive endowment spending overlooks critical factors such as legally binding donor agreements, fiduciary duties, and strategic long-term financial management. Endowments are designed to maintain institutional stability and continuity over decades - not as quick fixes for immediate crises.

Ultimately, universities need stable federal support to function effectively. While endowments provide a critical financial foundation, they cannot and should not replace consistent public funding. Without reliable federal investment, we risk undermining innovation, economic growth, and equitable access to higher education - consequences felt not only by universities but across society.

Ensuring the vitality and resilience of higher education requires more than policy reforms—it demands a shared commitment from all stakeholders. Alumni, donors, policymakers, and the public must come together to champion federal funding as a cornerstone of accessible, innovative, and equitable higher learning. By understanding the purposeful limitations of endowments and prioritizing sustainable funding solutions, we protect the transformative power of universities to drive discovery, foster opportunity, and fuel prosperity for generations to come.