A:

Endowments represent money or other financial assets that are donated to universities or colleges. The sole intention of the endowment is to invest it, so that the total asset value will yield an inflation-adjusted principal amount, along with additional income for further investments and supplementary expenditures. Typically, endowment funds follow a fairly strict policy allocation, which is a set of long-term guidelines that dictates the asset allocation that will yield the targeted return requirement without taking on too much risk.

Most endowments have guidelines that state how much of each year's investment income can be spent. For many universities, this amount is about 5% of the endowment's total asset value. Because some of the more coveted schools, such as Harvard, have endowments worth billions of dollars, this 5% can equal a large sum of money.

Endowment donors can sometimes restrict schools on how they can spend this money. For example, donors can decide to use a portion of an endowment's scheduled income on a merit-based or need-based scholarship. Another standard restrictive use of an endowment's income is to provide funding for endowed professorships, which are used to attract world-class educators.

Other than these restrictions, universities can use the rest of the allotted spending amount as standard income. Decisions about whether it should be spent on hiring professors, upgrading/repairing facilities or funding more scholarships is left up to school administrators. An endowment's investment income can also significantly lowers tuition costs for students. For example, if a university's endowment yields a total of $150 million and has a 5% spending limit, this would provide $7.5 million of available income. If the university had originally budgeted $5.5 million in endowment funds, this would mean that the excess $2 million could be used to pay other debts/expenses - savings that could be passed on to students.

However, because universities depend on investment returns for supplementary income, there could be trouble if the investments do not yield a suitable amount of returns. Therefore, most endowments are run by professionals to ensure that the investments made are in line with the aforementioned policy allocation.

To learn more about the financial aspects of continuing education, check out Investing In Your Child's Education.

RELATED FAQS
  1. How do "factor endowments" impact a country's comparative advantage?

    Find out how factor endowments – namely labor, land and capital – affect a country's comparative advantage and how that advantage ... Read Answer >>
  2. What is a tax-free 1035 Exchange?

  3. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade, including factor endowments, barriers to trade, ... Read Answer >>
  4. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  5. What country spends the most on education?

    Learn about the amounts that various developed nations spend on educating their young people compared to education spending ... Read Answer >>
  6. What is the difference between comprehensive income and gross income?

    Learn the specifics of both comprehensive income and gross income, how they are legally defined, and the primary difference ... Read Answer >>
Related Articles
  1. Managing Wealth

    What is an Endowment?

    An endowment is a financial gift to a non-profit group or institution.
  2. Managing Wealth

    Explaining Endowment Funds

    An endowment fund is money set aside to earn revenue to fund some type of charitable activity.
  3. Managing Wealth

    Should University Endowments Be Taxed?

    Some politicians are calling for universities to pay taxes on their massive endowments. Should they?
  4. Financial Advisor

    Investing Like a Billionaire: How You Can Do It

    Now more than ever, less-wealthy investors have access to products and strategies that were once the domain of the ultra-wealthy.
  5. Managing Wealth

    The Pros Of An Endowment Life Insurance Policy

    Endowment life insurance is a way to save for your child's college education. Here's a look at the positives of a policy like this.
  6. Insights

    David Swensen vs. Stephen Blyth: Tale of the Tape (DB, MS)

    Learn about the managers and specifics of the Yale and Harvard University endowments, with a focus on performance and asset allocation.
  7. Financial Advisor

    How to Create a Client Investment Policy Statement

    Investment policy statements are vital for financial advisors and their clients. Here are some tips for creating them.
  8. Managing Wealth

    Carried Interest: A Loophole in America’s Tax Code

    With income inequality becoming an increasingly apparent problem in the U.S., it is time to start removing tax loopholes like carried interest.
  9. Managing Wealth

    University Donations: Which Schools Got the Most

    A closer look at the staggering $40.3 billion donated to colleges and universities in 2015.
  10. Investing

    Want A Career In Asset Management? Read This First

    When it comes to landing that job at an asset manager, not all degrees are created equally. Here's a look at the best schools for the job.
RELATED TERMS
  1. Endowment

    A financial asset donation made to a non-profit group or institution ...
  2. Endowment Fund

    An investment fund set up by an institution in which regular ...
  3. Unitized Endowment Pool - UEP

    A form of endowment investing that has mechanics similar to that ...
  4. Endowment Loan

    A type of mortgage in which the borrower makes only interest ...
  5. Accelerative Endowment

    An option in a whole life insurance policy to use accumulated ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center