Understanding endowments

How university endowments work, why they’re restricted, and what new tax laws could mean for funding and financial aid

• Endowments are restricted funds that must be used according to donor intent, limiting their flexibility for covering general expenses.
• Proposed tax increases and National Institutes of Health (NIH) funding caps are pressuring universities, but using endowments to fill gaps isn’t always possible or appropriate.
• Endowment spending is essential for long-term financial planning, especially for funding scholarships and sustaining key academic programs.

For advancement professionals and sophisticated donors, university endowments are a familiar part of the fundraising landscape. For the general public, however, the concept is newly top of mind due to the recently proposed Endowment Tax Fairness Act. If passed, this bill would raise the tax levied on annual private university endowment profits from 1.4% to 21% to match the corporate tax rate, though it would only apply to universities with at least 500 students and endowment assets of more than $500,000 per student.

This proposed bill is part of the one-two punch currently facing many universities, the other being dramatic cuts to NIH research grant indirect expenses. As of February 7, 2025, NIH announced a blanket cap of 15%. Enforcement of this cap is currently enjoined by a preliminary injunction, but uncertainty around the future of indirect cost reimbursement and overall federal funding for biomedical research remains.

Some commenters have claimed that universities should fill the gap by redirecting funds from their endowments, arguing that if universities have endowments large enough to be affected by the Endowment Tax Fairness Act, they’re more than well-enough resourced to meet their own operating needs without government funding. However, endowments serve a specific purpose that restricts funds from being used this way.

Pre-eminent research institutions in the U.S. have significant endowments, with Harvard topping the list at $53.2 billion.

However, endowments are not an all-purpose bank vault a university can tap into for any reason.”

An endowment gift is mechanically different from a standard cash gift: the donor’s funds are invested in equities, bonds, or other vehicles, and the university draws on and spends a portion of the investment earnings while leaving the principal untouched. But in another sense, endowment gifts are the same as any other commitment: they must be spent in alignment with donor intent.

Data from the American Association of Universities (AAU) suggest that between 55% and 78% of all higher education endowment assets are restricted gifts. At some institutions, the figure is even higher: as of 2020, 90% of Stanford University’s endowment was restricted. 80% of Harvard University’s endowment is restricted. Donors who make a restricted gift sign a binding gift agreement stating their funds can only be used for a particular purpose. It doesn’t matter if a university would like to use its endowment for indirect research expenses. If the gift agreement states the funds must be used for an endowed professorship or financial aid, then the university must abide by the agreement.

The reduction in NIH indirect expenses reflects a drastic hit to the country’s research universities. However, funneling endowment dollars to fill the gap is not the answer — not only because it’s often not allowed, but also because both restricted and unrestricted endowment funds already fill a crucial role in the higher education funding landscape.

Endowed gifts are particularly beneficial in helping universities weather periods of financial uncertainty. A university may not be able to predict whether a windfall philanthropic gift will arrive in the coming year, and for public institutions, state funding may vary significantly. A university’s annual 4–5% endowment draw, on the other hand, can be allocated in advance, giving the institution confidence that it will be able to fund the programs and scholarships it is planning.

For that reason, endowment spending is a critical piece of the financial aid puzzle for many universities. A 2024 study conducted by the National Association of College and University Business Offices (NACUBO) looked at the endowment spending of 658 colleges, universities, and education-related foundations. Of the combined $30 billion these institutions spent from their endowments — representing an average of 14% of their operating budgets — 48.1% went to fund student financial aid programs. If this funding were redirected or reduced due to increased taxes, institutions would likely be forced to reduce financial aid or increase tuition to cover budget shortfalls.

Endowment giving also meets a particular need for donors, one that could be compromised by redirecting funds. Many donors consider endowment gifts to be investments in a university’s future, to a stronger degree than cash gifts or pledges. With a well-managed endowment, a university can fund today’s needs using investment earnings while preserving resources to support future generations.

A donor who makes an endowment gift, therefore, often has the intention of supporting a cause or program in perpetuity — an agreement that represents a massive investment of trust in the institution. If donors are uncertain whether a university will uphold the requirements of their gift agreement and spend their gift as it was originally intended, what’s to say they will have the confidence to make another gift in the future?

Endowments are a critically important tool in university funding models, and it’s essential to be clear about what they are and are not. Far from a generic slush fund that can be used to plug holes, university endowments are vital to ensuring long-term funding for critical programs. While the ramifications of the proposed Endowment Tax Fairness Act are still unknown, the potential loss of spendable dollars it represents could have a very real impact on universities’ ability to fund the cutting-edge research and life-changing education for which they are known.