College endowments

Some folks are familiar with college endowments and some folks aren’t, so here’s a quick post to fill you in on what you need to know. My dissertation has to do with college finance, and you can’t talk about college finance these days without talking about endowments.

In a nutshell, colleges have a long history of receiving private gifts from donors, alumni, businesses, etc. in order to help increase a college’s service capacity. These gifts can be small things like a $25 donation from a recent alumni to “major gifts” like real estate or multi-million dollar donations from corporations or philanthropists. All these gifts are tax-free.

An endowment is run by professional staff who manage these assets independently from the college, and these assets are used to pay for things like new dorms or classrooms, scholarship programs, recruiting all-star faculty members, etc. Since all donations made to college endowments are tax-exempt, they’ve become popular places for wealthy alumni to put their dough, rather than having Uncle Sam take it.

But what is really interesting about college endowments is their sheer size. Check this out. The nation’s largest college endowment (Harvard University) has assets worth more than $28 billion. Yes, BILLION. The top 25 college endowments have assets worth more than $180 billion, which is about $11 billion MORE than the nation’s top 25 private foundations like the Gates Foundation, Ford Foundation, Lilly Endowment, Rockefeller Foundation, Kellogg Foundation, etc. That’s a lot of billions. Needless to say, colleges are bringing in the money and their assets are growing every year.

All private foundations (Gates, Ford, etc.) are required by law to spend at least 5% of their assets each year on philanthropic causes, but college endowments aren’t required to do so. Most colleges spend less than 5% of their assets each year. And now that college is becoming so expensive there is some pressure coming from Congress to get these colleges to shell out more bucks for financial aid, but it doesn’t look like that’s going anywhere.

Here’s another interesting thing about these endowments. You know how there’s a growing gap in income inequality in the US (rich get richer, poor get poorer). Well, the same type of thing is happening with college endowments. There are a select number of colleges that either have (or are working towards) billion-dollar endowments, but the vast majority of colleges have relatively small endowments. So, what we see is a select group of colleges pulling really far ahead of most “regular” colleges in the constant race for prestige.

I’d like to see more of these “major gift” donors spend their money on community colleges or regional colleges where the money could really go far. Instead, we see small colleges scraping by, having a hard time keeping their doors open (and affordable). In Kalamazoo, Michigan, a group of philanthropists got together and pooled their money so that any kid who graduates from a K’zoo high school will get tuition paid for at any public college in Michigan. Now that’s more like it! What if some donors got together and started an endowment at a local community college, where students could attend at no cost and where the facilities and professors were top-notch? Now how cool would that be?