In education, we hear a lot about endowments.

How many times have you heard this: Harvard has a $40 billion endowment, so why is tuition so expensive?

So what are the rules for endowments and how can schools use them for an emergency?

Twitter: You need an endowment thread

An endowment fund is set up by a foundation and in reality, is a bundling of several individual endowment donations.

Because money is charitably given, much effort is taken to de-risk the investments.

THE MOST IMPORTANT PART: Endowments are intended to provide a long-term, stable source of income.

This is a very "old money" traditional way of doing things, but these funds are set up so that donations grow and keep giving in perpetuity.

Income generated from the endowment does finance a portion of a school’s operating costs.

For small schools, it’s commonly intended to offset the cost of tuition to the extent that it can.

On average, schools spend 49% of endowment withdrawals on financial aid.

Donors can specify exactly how they’d like their donation to be used (i.e. professorships, scholarships, buildings).

Management of those funds must follow the guidelines and cannot be changed without the donor’s consent.

Usually ~70% of funds are restricted in this way.

Funds have regulations about how much of a given year’s investment income can be spent as operating budget.

Most often this is 5% of the fund’s total asset value.

In some cases, endowments are managed by hired help from the finance sector.

In the early ’90s, funds were primarily invested in traditional stocks and bonds.

Now, ~50% is invested that way, and a higher % is invested in private equity and off-campus real estate.

So...now there's a pandemic and schools are in financial trouble.

1) Can they use these millions of dollars as financial relief to help in case of emergency (ICE)?

2) Would that be helpful?

3) What happens to the money if a school has to close?

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Q: Can schools access endowments ICE?

A: No.

Legal trouble looms if they do.

There are loopholes, but it requires some legal grounds that are often rare.

The only real option is donor consent.

Q: Would it help?

A: Surprisingly, not really.

Small, high-risk schools have small endowment funds. Sure, if schools had unrestricted access to 100% of the fund it might help some.

But...it's mostly a band-aid on a broken bone. It doesn't fix the problem.

Q: What happens to the money if a school closes?

A: It's complicated, but donors almost never get the money back.

Creditors are usually awarded endowment leftovers. Schools can also entrust money to a partner school or nearby school.

So what is the future of endowment funds for universities?

The internet has changed higher education like nothing ever before and schools are in a tough spot.

Endowments are far too restricted for today's world of higher education.

The only fix I can see comes in the form of government assistance.

If the govt. postponed the restriction of funds, WITH a stipulation that schools also had to lower tuition by X%, it could be a chance for many schools to right the ship.

Schools need a way to right-size their tuition while keeping faculty employed and keeping the lights on in the dorms.

This is one of the tallest tasks I can think of in this world.

In education, tradition runs deep. Endowments are part of that and they've been around since 1502 for schools.

Long-term health is no longer a given and lowering tuition costs is now the priority. Schools need greater access to financial aid dollars to make that happen.

Endowments are a great thing, but they're a luxury item. You don't invest in the market if you can't pay your water bill.

Schools need to pay the bills and they need to free up this money if they're going to do it.

It's time for them to go away.

If you're interested in endowments I've written about them here with even more expansion on some of these thoughts. https://www.ryansmulholland.com/writing/endowment-emergency