What is a college endowment, and why should you care?

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The U.S. Senate’s tax reform bill contains a provision that will apply an excise tax to large college endowments. The provision is a stark illustration of how members of Congress just don’t understand endowments, the roles they play in higher education and the impact this tax will have on students and their hard-working families.

To be fair, most people probably don’t spend a lot of time thinking about college endowments. So now might be a good time to clarify what they are and to debunk some myths. An endowment is not a huge pile of money that college administrators hoard like gold—something that will never move, never be spent, never be touched in any way. On its face, that analogy is half right, but overall it breaks down pretty quickly. They are funds crucial to the operation of any college or university. They are funds that the institution invests to support present students and to secure its future. Well managed, they grow.

For example, Columbia University College of Physicians and Surgeons just received a $250 million gift from an alumnus, $150 million of which is categorized as a restricted gift, meaning it can be only used for certain purposes dictated by the donor. In this case, Columbia says the restricted portion of the gift could grow large enough to “eliminate the need for student loans for all of its future medical students.” In a country short of doctors, this is wonderful news.

However, it will take years to generate enough returns from this gift to meet that goal. The benefit of endowments lies in their ability to grow into something greater than what donors actually gave. Instead, gifts to college endowments are meant to last in perpetuity to help future generations of students through scholarships, research grants, tuition waivers, and in countless other ways.

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. At Dickinson, our donors expect their gifts and the endowments to sustain this college for the benefit of students not yet born, to make good on our commitment to provide a useful education for the common good.

Without our generous benefactors whose gifts have created and sustained our endowment, many of our present students would simply not be able to afford a higher education that propels them into meaningful lives with the power to benefit society as much as the students themselves. Without healthy endowments, our doors—like the doors of all U.S. colleges and universities that I know of—would be closed to all but the very affluent.

At Dickinson, we spend 5 percent of our endowment annually. This is fractionally above the national average of 4.5 percent. Eighty percent of that spending supports Dickinson’s operating budget, including our own financial aid—aid that amounted to $49 million in fiscal year 2016-17. The more our endowment grows, the more meaningful that 5 percent becomes. Conversely, if colleges draw down on their endowments, spend their capital, this smaller pool of money will fail to provide the same income as time goes on.

Higher education is expensive, and many students, families and alumni have asked me why we don’t use the endowment to avoid tuition increases. The answer is, we already do. Without endowments, U.S. higher education fees would be even greater. While we do use some of the income from our endowment funds to absorb some of the tuition costs, there are limits on how much money can be prudently taken from these funds. Using endowment money to eliminate tuition increases is a short-term fix, and when done in perpetuity, it would cause long-term consequences to vital items such as financial aid and scholarships.

In a competitive world economy, our higher education system is a great gem and one of our most important assets, a driver of economic growth. It is what has made our position of world leadership possible. And to understand how misguided this provision is one must understand just how important college endowments are to so many.