What is a College Endowment and Why is it So Important?

Wondering what a college endowment is? Then here is an article to give information about college endowment and its importance.

TCM Staff

12th May 2020

As you begin to delve into your college prep you might come across the word “college endowment”. In this article, we will be providing an in-depth explanation regarding what it is and why it could be considered important for your admissions into a college of your choice. 

What is a College Endowment? 

An endowment refers to the amount or quantity of money and assets a college receives in the form of a donation or charity that is ultimately put toward the growth and development of the infrastructure and facilities.  This endowment is then used for a variety of things—scholarships, upgrading facilities, hiring professors, and more. Endowments are a symbol of trust. The donors trust that colleges and universities will invest wisely, trust that their gifts will grow in value over the years

Why is College Endowments so Important?

Higher education is expensive, and many students, families, and alumni have asked why the endowment is not used to avoid tuition increases. The answer is, it already is used. Without endowments, U.S. higher education fees would be even greater. While some of the income from the endowment funds is used to absorb some of the tuition costs, there are limits on how much money can be prudently taken from these funds.

As stated above higher education can be rather expensive, and sometimes potential and deserving candidates are not able to afford the tuition. So in order to provide more opportunities to the deserving, colleges can use their endowments to do so. College endowments allow universities to give out scholarships and set tuition amounts (among other things). Therefore, colleges with larger endowments can often give students scholarships.

What are the Endowment Policies and Restrictions?

Donors have a sufficient advantage as they can dictate the terms and conditions regarding the money and assets they are about to donate. This would mean that they can send their donations toward a specific branch of the university or college. For example, an alum who got in with the help of the scholarship program may wish that all of his proceeds go toward strengthening the program so it can afford more opportunities to people who deserve it. There are also spending limits and restrictions run by the university administrators.

  • An endowment typically includes many different funds. 

  • Some funds are given with the stipulation that the principal shall never be spent. In many of these cases, the donor restricts the income to one or several purposes, programs, or departments. Especially at research universities, a significant fraction of the endowment may not be available to support undergraduate programs.

  • In other cases, the institution can select the educational purposes the gift will serve, but it can still only spend income.

  • Sometimes donors permit the spending of principal, but the institution decides to treat the gift as an endowment so it can continue to yield income in support of long-term obligations. These are called “funds functioning as an endowment.”

  • Among all higher education institutions, 88 percent of invested funds are reported as endowment and 12 percent as quasi-endowment.

Endowment Per Student

School endowments all alone don't reveal to us much. endowment per understudy is a superior pointer of the school's capacity to help and put resources into its understudies. 

A college may have a $2 billion enrichment yet have 20,000 understudies, so it would have $100,000 per understudy. Be that as it may, per understudy additionally depends on what number of full-time understudies are joining in. Cornell school and college, for instance, has an almost $2 billion blessing yet just has around 1,700 understudies, so the gift per understudy is somewhat over $1,000,000. 

On the off chance that a school acquires 5% every year on its enrichment, a school with $100,000 wins $5,000, however, a school with a $1,000,000 blessing would gain $50,000, which implies that school could likely completely finance a $50,000/year educational cost without losing cash.

Restrictions of College Endowment Policies

  • By contrast, funds donated to college and university endowments are given for the express purpose of supporting designated educational or scholarly activities over a long period of time. 

  • The pressures on colleges and universities push in the direction of spending more of the endowment’s earnings on current purposes, to the potential detriment of sustaining the purchasing power of the endowment for a future in which the costs of high-quality education and research are likely to be even greater than they are now

  • Institutions, on average, seek endowment growth of at least 8 percent a year (dividends plus appreciation) to keep up with inflation, cover investment management costs, and approach a 5 percent spending rate

In conclusion, a college endowment is the best possible way to ensure that people of all backgrounds irrespective of their financial position get a chance at a good education.

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