Think back to spring of 2020, when “university by Zoom” replaced the college experience of popular imagination and became the reality of students’ lives for the next year and half.
Schools rushed to empty dorms and classrooms, while suddenly students found themselves studying through computers from their childhood homes — if they were lucky enough to have that option. The house parties, extracurricular activities and office hours had all disappeared.
One thing that remained constant: the price students were paying.
Student protests over paying the same amount for a different product — which turned into several lawsuits — typically featured a request that their college turn to its endowment to provide some kind of discount or refund. This urging was met with the same response across the country: A polite no.
Drawing on an endowment to address every tuition complaint would indeed be extreme and go against the purpose of the reserve, which is to keep a university on solid financial footing for years to come. Though some colleges, now flush thanks to an extraordinary bull market over the past year or so, plan to spend their endowment funds more aggressively, most hunkered down during the depths of the early days of the pandemic. They protected their endowment resources even as they laid off faculty and staff, while accepting billions in federal relief funds.
But what if colleges were more nimble in their approach to their endowments, allowing them to more easily help students in times of crisis? At least one school took that step during the pandemic and another is reconsidering how its endowment could be used to more directly help students long-term. And for decades one college has used its endowment essentially as a “tuition replacement fund,” allowing students to attend for free.
These examples are few and far between, but they illustrate that in an era of growing college costs and rising student debt for families, it’s possible for universities to think more creatively about the money they’ve accumulated — if they’re willing.
Of course, the pandemic wasn’t the first time critics and even lawmakers questioned schools’ approach to their endowments — some have quipped that elite universities are really hedge funds with colleges attached. At the wealthiest schools, endowment value reaches into the several billions, even as some students still rack up debt to attend, while the number of low-income, fully subsidized students with access to these institutions remains relatively small.
Universities often respond to these doubts by noting their endowments are used to support financial aid and that the goal of endowments is to sustain institutions in perpetuity, not diminish the impact of a momentary crisis. Officials also argue that an endowment is a collection of funds that donors often designate for specific purposes, and not a giant pot of money that can be freely tapped.
Jennifer Bird-Pollan, associate dean of academic affairs at the University of Kentucky’s J. David Rosenberg College of Law, has heard all of these explanations and remains unconvinced after seeing the devastation caused by the pandemic.
“We should as a society be talking about the fact that we didn’t see a lot of spend out even though universities did experience a crisis,” says Bird-Pollan. “If this was not the way to solve that, then what is [an endowment] for?”
Where there’s a will to spend an endowment…
With their classrooms empty and hallways silent, academic institutions across America mostly did nothing extraordinary with their endowments during the early lockdown phase of the pandemic. In the endowment offices of the nation’s colleges and universities, it was business as usual.
In June 2020, only 8% of institutions planned to increase their endowment spending rate, according to a survey from the National Association of College and University Business Officers. By February, NACUBO reported the average endowment spending rate ticked up slightly to 4.59% in fiscal year 2020 up from 4.36% in fiscal year 2019 — though that’s a rate in line with historical patterns.
But in the northern Californian town of San Rafael, Calif., one small college with a modest endowment, Dominican University of California, proved that a school could spend more than usual out of its funds to stave off some of the most dire consequences of the pandemic, like faculty and staff layoffs.
“‘We should as a society be talking about the fact that we didn’t see a lot of spendout even though universities did experience a crisis.’”
— Jennifer Bird-Pollan, associate dean of academic affairs at the University of Kentucky’s J. David Rosenberg College of Law
“For the first time in my decade of leadership the board authorized an endowment draw so that there wouldn’t be layoffs, as long as the staff could reimagine their jobs to provide student support,” said Mary Marcy, who was president of Dominican University of California at the time.
For example, the school’s events team, which typically works with outside organizations interested in using the Dominican campus — a business that the early days of the pandemic shut down — pivoted to lead the school’s weekly testing program.
Like most universities, Dominican typically draws down roughly 5% of its endowment each year, or about $1.5 million. Last year, they tapped an additional $3 million, Marcy said.
“The idea of furloughing seemed to us that it would have a direct and negative impact on students,” she said.
The school also used the endowment draw to direct more funding to student support services. Some of that funding went toward the work of the HOPE Team, which the school convened in the early days of the pandemic. (HOPE stands for Help Our Penguins get Educated; penguins are the school’s mascot.)
At Dominican University of California, officials used the endowment to stave off layoffs during the early days of the pandemic.
David Studarus Photography
The team included members from departments across the university, ranging from financial aid to student life and academic affairs, to help Dominican respond nimbly to students’ needs.
“Traditionally, the academic side of the house might not look at the financial side of what’s going on,” said Mojgan Behmand, Dominican’s vice president for academic affairs and the chair of the HOPE Team. “It seemed really important to build a bridge there and with the pandemic it became all the more important.”
“‘Endowments can be crucial to both short- and long-term sustainability for a campus, but I also think we have to be more nimble and creative in how we use them.’”
— Mary Marcy, President Emerita of Dominican University of California
By meeting once a week, the group was able to identify and address pain points for students they might not have been able to see in their individual departments. For example, holds for unpaid bills that could prevent students from registering for their next semester of classes, Behmand said.
In those cases, the school would reach out to impacted students to see how they could help them overcome that hurdle — whether through a nudge to fill out their financial-aid forms, an emergency grant or other strategy — so the students could continue their educational progress.
Having a relatively small endowment may have actually helped Dominican think more creatively about how to use their funds, said Marcy, who is the president emerita of the school and president-in-residence at the Harvard Graduate School of Education. “We were never under the illusion that we could live off the fat of our endowment for years,” she said. “It’s hard to innovate if you don’t think it’s necessary because you’ve got something to fall back on.”
That approach to the endowment was also part of what made it possible for Dominican to use it during the pandemic. The school has been fiscally conservative over the past several years, including through narrow freezes on rehiring for faculty and staff, Marcy said.
“Endowments can be crucial to both short- and long-term sustainability for a campus, but I also think we have to be more nimble and creative in how we use them,” Marcy said.
For decades, one college has been using a radical approach to using its endowment — at least by the standards of the higher education industry.
Jeff Amburgey, the vice president for finance at Berea College in Berea, Ky., is blunt: “For Berea, the endowment itself is really what I would consider the tuition replacement fund at the college.”
Berea’s roughly 1,600 undergraduate students don’t pay tuition to attend the college — an objective the endowment supports. Berea’s commitment to serving students who may be blocked from accessing higher education dates all the way back to its founding in 1855 as the first interracial and coeducational college in the South.
Students at Berea College don’t pay tuition, an objective, which the endowment helps to support.
Credit: Crystal Wylie
While students are on the hook for expenses, like room and board, they’re given a job at the school to pay those bills. The result is that just 10% of students borrow to attend Berea, according to government data. Of those who borrow, the average debt load is less than $7,000, according to the school.
The school’s approach to the endowment was shaped in large part by two historical decisions, according to Lyle Roelofs, the college’s president. The first made in 1892, was a directive by the school’s then-president William Gooddell Frost, was not to charge tuition to Berea students.
The second decision, made about 20 years later by the school’s board of trustees, while Frost was still president, was to require that any unrestricted bequests donated to the college be turned into endowments, or funds that were supposed to last in perpetuity.
“That was a way of restraining administrators from the temptation of using a gift for other purposes,” Roelofs said.
In addition to these rules, prudent financial management has also played a role in allowing the endowment to continue to serve this purpose. Since 1993, the school has spent $1.1 billion from its endowment, according to Amburgey, a level of spending that indicates the importance of ensuring the endowment’s value continues to grow.
Berea manages its endowment using a weighted average formula that includes measures like the consumer-price index, past spending and the market value of the endowment. The board of trustees reviews the proposed draw — or the amount they plan to spend from the endowment — if it’s below 4% or above 6% of the endowment’s value at the end of the previous fiscal year.
That’s different from the approach of many schools, which calculate their draw as roughly 5% of a rolling average of the endowment’s value over a certain number of quarters. “That would work fine with most schools that may be 5% to 10% dependent on that endowment return,” Amburgey said. “For Berea, that’s totally dependent on endowment spending, it’s like turning around a 1,000-foot ship, we can’t be jerked around by the market.”
Of course, the market isn’t responsible for all of the growth in Berea’s endowment: Gifts play a role too. The clarity of the school’s mission — Berea only serves low-income students — can be beneficial when seeking funds, Roelofs said.
“It’s a completely different case that you make in fundraising for the endowment when every single student would otherwise not be able to afford to pay tuition,” he said.
At Hope College, Matthew Scogin, the school’s president, said he’s already seen the benefit of fundraising for a transformative goal. Officials at the Christian liberal arts school in Holland, Michigan, announced in July that they’d like to eventually replace tuition with a model where students donate to the school after they graduate.
But they don’t need the alumni’s money to make the program work financially. Instead, they’re planning to raise $1 billion for their endowment so they can fund the program up front. The school already raised $32 million as of late September and is starting with a pilot cohort of 22 students this fall.
“I actually think it may be easier to raise a big amount of money for a big vision than it would be to raise a medium amount of money for a medium sized vision,” he said.
Hope College in Holland, Michigan is hoping to raise $1 billion for its endowment so that it can offer education tuition-free.
Scogin said he knows Hope has a long way to go before bringing in enough money for all of the school’s roughly 3,000 undergraduate students to attend tuition-free.
Still, he’s optimistic. Hope’s facilities are up-to-date and they’ve recently enrolled some of the college’s largest classes in history. All of those factors meant the time seemed right to “use our momentum to do a big push around the endowment so that we can change the way that it’s funded,” Scogin said.
‘Why can’t you just pull down $100 million?’
Despite these examples, there are still obstacles to an industrywide rethinking of endowments to focus less on buildings and endowed professorships, and more on the less glamorous work of a university, like ensuring students complete school without too much debt and avoiding faculty layoffs in times of crisis.
Ed Chaney, who works with nonprofits as an attorney at Schell Bray, said the law provides some limits to how creative colleges can get with their endowments.
“In a time of crisis, there’s an expectation that you’ve got a billion dollars why can’t you just pull down $100 million?” he said. “It’s not so easy.”
Chaney notes that typically an endowment is actually a collection of many individual endowed funds, some of which are designated for specific purposes, like building maintenance, or a scholarship program. That means universities can’t just tap them for an unrelated purpose. In addition, by law, nonprofits can only spend a percentage of their endowment each year that the organization deems to be prudent considering certain facts and circumstances.
The idea behind that standard is to protect the donor’s intention to create an endowment that survives in perpetuity and to protect the spending power of the gift, Chaney said. If institutions used the funds too quickly and the market deteriorated, the value of the principal of the endowment fund could erode.
Peter Conti-Brown, an associate professor of financial regulation at the University of Pennsylvania’s Wharton School, doesn’t buy the excuse that college endowments are too restricted to spend during times of crisis.
“It’s simply not empirically true that the endowment is so legally constrained as many universities have said,” Conti-Brown said.
And indeed, Chaney said there are creative approaches universities can take to spending more of their endowment wealth. For example, they could include a financial crisis in the facts and circumstances they consider when evaluating whether a given spend down rate is prudent.
Schools can also conduct a fund by fund analysis to see whether some funds have more flexibility than they originally thought or whether they’re truly endowed funds. Some colleges treat gifts from donors as an endowment, even when they’re not, which means they have more flexibility to spend that money right now instead of preserving it for the future, he said.
In addition, colleges could look at funds that are dormant, underused or otherwise where there is excess money — for example, a donation for an endowed chair that’s no longer in existence — and if the donor is still alive, ask if the money could be repurposed, Chaney said. If they’re dead, the school will likely have to get court approval to use the funds.
But Conti-Brown suspects there are reasons other than the hassle of doing a fund by fund analysis why universities are so hesitant to spend down their war chests. As he puts it: “Market pressures.”
“Higher education in the U.S. is a fiercely competitive environment driven by perceptions,” he said. “There is very little to be gained from liquidating an endowment on behalf of students, when the value of the endowment itself is one of these competitive points of reference.”
He notes that press releases announcing new hires for president of a school or other high-level position will often tout how much a school’s endowment grew under their watch.
“The entire apparatus of how administrators think about endowment spending makes no sense except from a self-interested perspective,” said Brian Galle, a professor at Georgetown University Law Center, who studies taxation and nonprofit organizations. “These are people who get judged by where they show up on the list of biggest endowments.”
“‘These are people who get judged by where they show up on the list of biggest endowments.’”
— Brian Galle, a professor at Georgetown University Law Center
Given that, “It’s really hard to convince them to think creatively,” and use the money to, for example, expand access to their schools for disadvantaged students, Galle said.
From her seat at the University of Kentucky, Bird-Pollan sees another factor too: The push, inspired by Wall Street, where many university investment professionals have cut their teeth, for outsized returns. In addition, some universities invest with private-equity firms and hedge funds.
“I’m not going to call it greed because there’s no reason that the universities shouldn’t want as good of a return as it can get on its assets,” said Bird-Pollan, who recently wrote a law review article looking at the tax treatment of university endowments.
“The question is, is this just part of a larger problem that we’ve created a society where the accumulation of wealth is a goal itself?”
This past fiscal year, some endowments saw returns they hadn’t experienced in years, in some cases more than 50%. Some colleges did decide to take a creative approach to that extraordinary build up in funds. Those outsized returns come at a time when Congress is considering repealing an excise tax signed into law in 2017 on endowments at private universities that have at least 500 tuition paying students and assets of $500,000 per student or more. Galle suspects that the optics of such a large windfall could put the repeal of that tax in jeopardy — if universities didn’t find novel ways to use the money.
At Washington University in St. Louis, which saw a 65% return on its endowment during the 2020-2021 fiscal year, tax policy wasn’t a motivating factor in considering how they would spend that windfall, said Andrew D. Martin, the school’s chancellor.
“Of course we do not want our endowment to be taxed, because that would significantly impair our ability to fulfill our mission,” he said. “However, we are not making financial decisions based on that possibility.”
Instead, the extraordinary return provided a “once in a lifetime opportunity” for the school to finance some of its strategic priorities, Martin said.
High on that list was increasing financial support for students. When he became Washington University’s chancellor in 2018, Martin said he made a commitment to move the school to need-blind admissions, or not considering a student’s financial circumstances when making admissions decisions, while at the same time committing to meet 100% of undergraduates’ demonstrated financial need.
At the time Martin made the promise, he assumed the school would need to raise significant philanthropy or find some way to reallocate capital to make it happen. Then in spring of 2021, it became apparent that the school was going to see an extraordinary endowment return.
Wash U’s chief financial officer, Amy Kweskin, worked with outside counsel, consulting firms and the school’s investment management team to figure out a way to leverage the endowment return to move to need-blind admissions — without violating any of the constraints on the fund
What they came up with was essentially a 1.3 to 1 stock split, increasing the number of shares in the endowment by 0.3 for every one share. About two-thirds of the school’s endowment is restricted and so all of the new shares that are part of that portion of the fund received the full 65% return.
But for the unrestricted portion of the endowment, the school swept aside some of those new shares and used them to create a new fund with $1 billion dedicated to financial aid.
Once they came up with the idea, Martin said he shifted to “selling mode,” working to get internal stakeholders, the board of trustees and others on board. It wasn’t too hard to convince them, because leadership had already coalesced around the importance of the broader goal a few years ago.
“Ours is a university that’s really struggled around issues of socioeconomic diversity,” Martin said. Indeed, in some years, the school was named the least economically diverse in the country by one measure.
“We really needed to step up and invest substantially more in financial aid, that case was made in subtle and unsubtle ways really for a couple of years,” Martin said.