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At prestigious universities across the nation, a financial powerhouse lies hidden in plain sight — the college endowment. These multi-billion dollar funds, built over generations through donations and investments, have found themselves at the center of heated debate and student protests. From the Ivies to state schools nationwide, students are demanding greater transparency and ethical investment practices for their institution's vast fortunes. But what exactly are college endowments, and why have they become such a contentious issue?

At its core, a college endowment is a collection of donations intended to support an institution's mission. Below, we'll unravel the history, inner workings, and controversies of college endowments. Whether you're a prospective student considering which college to attend or a concerned citizen interested in the financial underpinnings of higher education, read on to gain a deeper understanding of these complex entities and their impact.

What Is a College Endowment?

A college endowment is a collection of donated funds invested to support the long-term financial health and goals of a higher education institution. Donations from alumni, corporations, foundations, and others provide a perpetual source of income for the university through investment returns. For the most prestigious universities, these funds often total billions of dollars.

Purpose and Importance

Endowments are a crucial aspect of financial planning for colleges and universities. They provide a reliable stream of income that isn't subject to the fluctuations of tuition revenue or government funding. This allows institutions to plan for the long term, invest in ambitious projects, and weather economic downturns. Endowments also play a vital role in supporting academic excellence by funding scholarships, attracting top faculty, and investing in state-of-the-art research facilities.

Historical Roots of College Endowments

The concept of endowments , with roots in medieval Europe where wealthy patrons would donate land or money to support religious institutions or scholars. Some of the oldest college endowments in the United States belong to (1638) and (1718), but the total value of college endowments remained modest until the late 19th and early 20th centuries. During this period of economic growth, a surge in surplus wealth led to increased donations to higher education institutions.

Types of Endowments

There are several types of endowments, each with its own set of rules and restrictions.

Endowments offer many benefits to colleges and universities, but their growing size and influence have raised important questions about their management and broader impact. We will explore these questions further, but first, let's delve into the mechanics of how these financial entities operate.

How Do College Endowments Work?

College endowments operate as long-term investment portfolios designed to generate income for the institution while preserving the principal for future generations. The mechanics of building, investing, and spending endowment funds involve a combination of fundraising, strategic investment, and careful financial management.

Fundraising and Donations

Endowments are primarily built through philanthropic gifts. Alumni are often significant contributors, but donations also come from corporations, foundations, and other individuals who believe in the institution's mission. These gifts can take various forms:

Universities actively engage in fundraising efforts to encourage donations, often targeting alumni and cultivating relationships with potential donors.

Investment Strategies

Endowment funds are not simply kept in a savings account. They are actively invested to grow over time. Investment strategies vary depending on an institution's risk tolerance and goals, but common investment vehicles include the following:

Diversification is key to endowment investment. By spreading investments across different asset classes, institutions can mitigate risk and potentially achieve higher returns.

Endowment Spending

Endowment spending is directed toward an array of initiatives that support the university's mission. Below are some common uses of endowment funds:

• Scholarships and financial aid

• Research

• Faculty salaries and endowed professorships

• Facilities and infrastructure

• Academic programs

The specific allocation of endowment spending varies from institution to institution, depending on their priorities and the restrictions placed on specific endowments.

Spending Policies

Endowments are not intended to be spent all at once. Instead, universities typically follow a spending policy that dictates how much of the endowment's value can be spent each year. This annual spending rate is usually a percentage of the endowment's average market value over a certain period, and on average, it . 

Preserving the principal is also a fundamental piece of endowment management. By only spending a portion of the investment income, institutions aim to ensure that the endowment continues to grow and support future generations of students and faculty.

Universities With the Largest Endowments

Data from the Integrated Postsecondary Education Data System () showcases the top 20 U.S. universities with the largest endowments at the end of fiscal year 2022:

Ivy League and elite private universities dominate the top rankings, which is a testament to their established alumni networks and historical fundraising prowess. Although only five of the top 20 institutions are public, the University of Texas System holds the second largest endowment, largely thanks to . Other public institutions on the list have achieved endowment wealth through an accumulation of tens of thousands of donation funds as well as smart investment strategies. 

It's important to note that the public institutions on this list serve significantly larger populations than their private counterparts, which means the money often must be stretched further. For example, Harvard University serves 25,266 students annually, while the University of Texas System serves over 256,000 students annually.

Schools Experiencing Exponential Endowment Growth

While the largest endowments often garner attention, a closer look at endowment growth reveals some major transformations. Among the schools that have grown their endowments by over $100 million in the last 15 years, Liberty University, West Virginia University (WVU), and Simmons University stand out with the highest percentage of growth.

Liberty University's endowment grew from $6 million to $2.1 billion over 15 years, while WVU's endowment skyrocketed from $1.5 million to $847 million. Simmons University also witnessed a remarkable 109,575% increase, with its endowment growing from $193,000 to $212 million. The "why" behind these surging figures is due to a mix of strategic restructuring, fundraising, and investing.

Liberty University: Online Programs and Government Funding

Liberty University's rise in endowment value can be attributed largely to its . With over 115,000 online students compared to just 15,800 on-campus students, Liberty has tapped into a vast market of learners seeking flexible and accessible educational options. A majority of Liberty University’s revenue — totaling almost $1 billion — also comes from taxpayer-funded sources.

WVU: Consistent Donations and High Returns

WVU's impressive endowment growth comes from the school's consistent donor support and strategic investment decisions. In 2022 alone, the university received from over 20,000 donors. The WVU Foundation has also experienced exceptional , with an 11.3% return at the end of fiscal year 2022. This puts WVU in the top 5% of endowments in the National Association of College and University Business Officers (NACUBO).

Simmons University: 2U Partnership and Online Growth

Similar to Liberty University, the success of Simmons University's endowment comes from its commitment to online education over the last decade. In 2012, Simmons established a to develop online programs. The online nursing program quickly outpaced enrollment in the institution's entire undergraduate program. By 2017, the revenue generated from Simmons' online programs surpassed the combined revenue of its thirty on-site graduate programs.

Do All Higher Education Institutions Have Endowments?

Endowments are a large financial resource for many colleges and universities, but not all institutions possess them, and endowment size varies. A 2022 analysis published in the found that the top 20% of universities hold 80% of total endowment wealth, and the bottom 20% hold only 0.6%.

At the end of the 2022 fiscal year, nearly two-thirds (73.5%) of public institutions were operating with endowments less than $50 million, with the median endowment sitting at $13 million. In contrast, around half (54%) of private nonprofit institutions were operating with endowments less than $50 million, with the median endowment at $42 million. 

Endowments serve as a powerful tool for advancing academic excellence and expanding opportunities, but their unequal distribution raises important questions about equity and access. While institutions with large endowments enjoy greater financial flexibility, institutions with smaller endowments may face challenges in maintaining quality academic programs and providing sufficient student support.

The Debate Over College Endowments

Critics argue that endowments, especially those held by wealthy institutions, and raise ethical concerns about investment practices and transparency.

Critiques and Concerns

One of the most prominent criticisms is the lack of transparency surrounding endowment investments. Institutions are required to disclose some financial information, but critics argue that the level of detail is often insufficient. This lack of transparency raises concerns about potential conflicts of interest, risky investment strategies, and the use of funds in ways that don't align with the university's mission.

Ethical investment practices are another contentious issue. Some endowments have come under fire for investing in industries that critics deem harmful or unethical, such as fossil fuels, private prisons, or companies with poor labor practices. Student activists have been vocal in demanding that their universities divest from such investments and adopt more socially responsible practices.

The tax-exempt status of endowments has also drawn scrutiny. Critics argue that wealthy institutions should not receive tax breaks on their massive endowments while students struggle with rising tuition costs and student debt. This concern was somewhat mitigated by the (TCJA), which requires institutions enrolling at least 500 students with endowment assets exceeding $500,000 per student to pay a tax of 1.4% on their net investment income. 

Counter Arguments

Universities and endowment managers have pushed back against some of these criticisms. They argue that endowments are complex entities with fiduciary responsibilities to protect and grow the funds for the benefit of current and future generations. 

Some have also argued that is not always the most effective way to achieve social change. They emphasize engagement with companies and using shareholder power to promote responsible business practices. They also maintain that the tax-exempt status of endowments is justified because of the public good that universities provide through education and research.

The debate over college endowments will likely continue as the size and influence of these funds grow. Institutions will need to find a balance between preserving their long-term financial health and addressing concerns about transparency, ethical investment, and social responsibility.

Endowments and Your College Choice

If you're a prospective student navigating the college decision process, understanding the nuances of college endowments can be useful. The size and management of an institution's endowment can offer insights into its financial health, commitment to student support, and academic priorities. But endowments are more than financial statements — they also reflect an institution's values and priorities. 

Researching how a college invests its endowment can help you align your educational choices with your personal values. By staying engaged in the ongoing dialogue on college endowments, you can make more informed decisions about your education and contribute to a broader conversation about the future of colleges and universities.