With the Trump administration seeking to cut federal funding for colleges and universities, you might be wondering whether the endowments of these institutions of higher education might be able to fill those gaps. Todd L. Ely, a professor of public administration at the University of Colorado Denver, explains what endowments are and the constraints placed on them.
What’s an endowment?
Endowments are pools of financial investments that belong to a nonprofit. These assets produce a revenue stream, typically from dividends, interest and realized capital gains. The funds endowments hold usually originate as charitable donations made to support an institution’s mission.
In most cases with higher education endowments, this wealth, which helps buoy a nonprofit’s budget, is supposed to last forever.
Contributions to endowments are tax-deductible for donors who itemize their tax returns. Once these funds are invested, they grow generally tax-free. But beginning in 2018, the federal government imposed a 1.4% excise tax on dozens of higher education institutions with relatively large endowments.
Few colleges or universities have a single endowment fund.
That’s because the donors who provide gifts large and small to the school over the years direct their donations to different funds reserved for specific purposes.
Harvard University’s endowment, worth $53.2 billion at the end of its 2024 fiscal year, for example, consists of roughly 14,600 distinct funds.
All told, money distributed from endowments covered more than 15%, on average, of college and university operating expenses in 2024. Some of America’s institutions of higher education, however, lean much more heavily than that on their endowments to pay their bills.
How do endowments influence higher education?
Endowments can serve multiple purposes.
In 2024, nearly half of all higher education spending paid for with endowment revenue funded scholarships and other kinds of aid for students, while almost 18% supported academic programs. Just under 11% paid for professors’ compensation, and almost 7% helped pay for running and maintaining campus facilities.
More broadly, endowments can help shield schools from financial hardships and maintain their long-term reputations.
When they’re set up to carry on in perpetuity, endowments must benefit both current and future generations. So when donors give to an endowment, they are arguably investing in the long-term viability of the institution.
This long-term focus suggests that endowments aren’t just rainy-day funds or financial reserves.
