Federal funding cuts raise questions about university endowments

In early March, the Trump administration canceled $400 million in grants and contracts to Columbia University over its handling of pro-Palestinian protests last year. The federal government sent the university a list of demands, such as suspending or expelling students who participated in the demonstrations. Columbia agreed to the demands.

The funds are still being withheld, with the federal task force stating that Columbia’s concessions represent only the “first step.” Dozens of medical and scientific studies at Columbia are in limbo. The Department of Health and Human Services did not reply to a request for comment.

Meanwhile, the university is facing growing backlash, with several critics arguing that Columbia should use its immense endowment to cover the shortfall rather than capitulate. One such op-ed in the New York Times was accompanied by a photo of a smashed piggy bank.

Columbia has an endowment of $14.8 billion, the 12th largest university endowment in the U.S., according to a study by the National Association of College and University Business Officers, or NACUBO, and asset manager Commonfund.

The study found 658 institutions had endowments totaling $873.7 billion. This wealth is highly concentrated, with 86% held by a fifth of surveyed universities.

Sheer size isn’t the only measure of Columbia’s financial resources. While Columbia’s endowment ranks behind those of some public universities, the Ivy League school has a much smaller student body, averaging nearly $500,000 in endowments per student. The University of Texas, on the other hand, has less than half as much per student despite having a $47.5 billion endowment.

But endowments, especially at wealthier institutions, also have a substantial portion of illiquid assets.

In the case of Columbia’s endowment, while global equities make up the largest allocation (31%), private equity and real assets represent 26% and 12%, respectively. Fixed income and cash make up only 2% and 1%, respectively, and the remaining 28% is is allocated to absolute return strategy funds, which include hedge funds and a portion of which is also illiquid, according to audit documents.

Education historian Bruce Kimball credits much of the wealth concentration to universities’ willingness to invest in riskier assets. Traditionally, university endowments were invested very conservatively. When Harvard shifted its allocation to 60% equities and 40% bonds in 1951, it was considered a bold move. In the ’70s, the Ford Foundation guided a few wealthy universities away from dividend-paying stocks to growth stocks.

“Universities that didn’t want to assume the risk fell behind,” said Kimball, emeritus professor of philosophy and history of education at the Ohio State University.

In the 1990s, Yale University started investing in alternative assets like hedge funds and natural resources. This “Yale Model” proved lucrative, but only universities with large endowments could afford to take on the risk and due diligence that come with alternative investments, according to Kimball.

At universities large and small, endowments aren’t slush funds. The endowments are actually made up of hundreds or even thousands of funds, and the majority of those are restricted by donors, to areas such as professorships, scholarships or research.

“Most of that money was put in for a specific purpose,” said Scott Bok, former chairman of the University of Pennsylvania. “Universities don’t have the ability to break open the proverbial piggy bank and just grab the money in whatever way they want.”

Endowments often follow a custom of only spending 5% annually, also a practice dating back to the 1970s, according to economist and former Northwestern University president Morton Schapiro. Assuming high single-digit percentage investment returns, spending only 5% allows the principal of the endowment to grow and keep pace with inflation.

University administrations often point to donor restrictions when pressed to increase spending. But Schapiro said this excuse is overplayed.

“It’s true that a lot of money is restricted, but it’s restricted to things you’re going to spend on already like need-based aid, study abroad, libraries,” he said.

Furthermore, some funds are not subject to donor restrictions but rather are earmarked by universities for specific purposes.

“It’s not really restricted,” said Schapiro of these quasi-endowments. “You could actually spend it at whatever rate that you really want.”

And while most states have guidelines on how endowment assets are spent, few have a set range or cap on spending, according to Brian Galle, professor of tax policy at Georgetown Law. It is also possible to get court approval to increase spending and use restricted endowments if it is crucial to the university’s mission, Galle said.

It is possible for universities to increase their endowment spending during times of crisis. Several did during the pandemic, including Northwestern and Penn. Donors can also give their written consent to lift endowment restrictions, according to Micah Malouf, special counsel at Schell Bray.

That said, while the restrictions may be exaggerated, the financial obligations are real, Kimball said. Colleges allocate nearly half their endowment spending to student financial aid, according to the NACUBO study.

Kimball described spending endowments or endowment income to cover short-term as “imprudent.” He compared the scenario to an employer canceling a prerequisite expense and asking employees to cover it with their savings and income.

“That regular salary is already earmarked for other purposes, so you would have to cut back on food, rent, etc.,” he said.

Depleting the endowment could come at the cost of future cash flow, as the university has less to invest. But Galle told CNBC that he believes this reasoning doesn’t hold water.

“When your roof is leaking, you don’t say, ‘I’m not going to spend the money now, because then I won’t be able to buy an umbrella in three years,'” he said.

Schapiro, who retired from Northwestern in 2022, said it’s easier to justify spending more of the endowment when coming off a strong market, which is currently the case.

However, it depends on how long the university’s shortfall is expected to last.

“If it’s going to be long term, you’re just delaying the inevitable,” he said.

There is no telling when or if the funding will be restored. The National Institute of Health is also implementing a 15% cap on research reimbursements for indirect costs, such as support staff wages and lab maintenance.

Other storm clouds loom overhead, said Bok, who resigned from Penn in late 2023. For starters, several members of Congress have proposed increasing an endowment tax that currently only applies to some 50 universities.

Since the first Trump administration, private universities that meet certain conditions, such as assets of $500,000 or more per full-time student, have been subject to a 1.4% tax on net investment income. One proposal would raise the rate to 21%, and another would increase the rate to 10% but lower the endowments per student threshold to $200,000, which would subject far more universities to the tax.

Adding to the challenges, many colleges are financially dependent on international students, who typically pay full tuition. International student enrollment decreased during the first Trump administration and international applications recently dropped for the first time in five years, according to Common App data.

All these challenges make for a perfect storm, Bok said.

“I think universities are going to be reluctant to say, ‘Oh, we’ll just draw down more in the endowment’ because it can fill a small hole but it can’t fill a big hole,” Bok said. “There might actually be a big hole by time all these things play out.”

Whether wealthy donors will step up is uncertain. Galle, citing research that poor endowment returns are a predictor of donations, said donors “tend to open their wallet” when they know the university is relying on them.

However, Bok and Schapiro said that covering canceled grants is a harder pitch to donors than building a library.

“In my experience of 30 years raising money, people give when they are confident in the future,” Schapiro said. “They don’t give money to prevent a disaster.”