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. 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 >>
  3. 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 >>
  4. 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 >>
Related Articles
  1. Managing Wealth

    How To Invest Like An Endowment

    Historically, Ivy League endowments have had a successful investment strategy. Will it work for you?
  2. Insights

    Top 5 Largest University Endowments

    The five largest university endowments in the world are Harvard, Yale, University of Texas...
  3. Financial Advisor

    Taxes on Endowments, How It Works

    Endowments and endowment funds are critical for non-profit organizations, and payouts are generally not taxable - but there are exceptions.
  4. Managing Wealth

    What is an Endowment?

    An endowment is a financial gift to a non-profit group or institution.
  5. Financial Advisor

    Here's How Schools and Charities Invest Their Endowment

    Each endowment has an investment policy statement, with topics on the mission statement, spending, investment, asset allocation and rebalancing policy.
  6. Managing Wealth

    Explaining Endowment Funds

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

    Should University Endowments Be Taxed?

    Some politicians are calling for universities to pay taxes on their massive endowments. Should they?
  8. Insights

    College Endowments Post Lowest Returns Since '09

    A new study reveals that U.S. college endowments posted their lowest returns since 2009. Last summer's market volatility could be the reason
  9. Financial Advisor

    Small Endowment Money: A $100B Opportunity

    A shift to outsourced management among small endowments is providing billions in opportunities to capture assets.
  10. Managing Wealth

    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.
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 ...
Trading Center