Understanding the Massive Growth of College Endowments

Did you know that the endowments of elite universities like Harvard and Yale are larger than the GDPs of entire countries? As tuition costs soar, it begs the question: where is all that money going?

Defining Endowments

Institutional endowments are pools of charitable donations—cash, securities, or property—that colleges invest to support their educational and research missions indefinitely. According to the American Council on Education, they represent an aggregation of assets meant to fund both current operations and future initiatives. While it might seem like one giant rainy day fund, in practice most endowments are thousands of separate accounts, each tied to donor restrictions. In a survey of 678 institutions, 20% reported endowments over $1 billion, yet more than half had less than $250 million.

“Think of it as a collection of fanny packs, each filled with specific donations,”
—Melissa Korn, Wall Street Journal reporter

How Universities Expand Endowment Wealth

The modern arms race dates largely to 1985, when David Swensen reinvented Yale’s approach to endowment investing. At his arrival, Yale’s fund stood at around $1 billion; by the time of his death in 2021, it had ballooned to roughly $31 billion [verify]. Swensen’s Yale Model shifted allocations from plain stocks and bonds into alternative assets like private equity, hedge funds, and real estate. Wealthy institutions eagerly recruited his proteges or hired his strategies, driving the average endowment of the top 15 universities to over $21 billion by the end of 2022 [verify]. Good money, smart managers, and decades of compounding yield unsurpassed growth.

Why Schools Stockpile Funds

Colleges argue that large endowments serve as crucial buffers against economic shocks and rising costs. When enrollment dips—say, during a pandemic—schools still face payroll obligations for tenured faculty, maintenance of historic campuses, and research contracts. Yet even with these justifications, many elite colleges imposed hiring freezes and salary cuts while their endowments continued to appreciate. Beyond unexpected downturns, institutions cite inflation in wages, technology, and infrastructure as reasons to keep saving. The result is a vast financial cushion that few would deny is prudent—though its scale can feel generous at the expense of today’s students.

Endowments and Prestige

In higher education, prestige is a currency that seldom devalues. Catherine Liu of UC Irvine notes that endowed funds allow universities to build dazzling amenities—Olympic-style athletic complexes, cutting-edge research facilities, and luxury dorms—that boost visibility and rankings. A top-tier endowment becomes both a marketing tool and a competitive moat: the more you have, the more you can spend on high-profile projects that attract wealthy applicants and influential donors. This cycle of wealth breeding prestige, which in turn breeds more wealth, helps explain why a $50 billion fund hardly dents university ambitions.

The Tuition-Endowment Disconnect

As endowments have flourished, tuition has surged. In 2022, average tuition and fees at private U.S. colleges approached $40,000 per year—4% more than the prior year—and public four-year universities have seen costs roughly triple since 1990 [verify]. Families struggle under rising sticker prices and student debt, even though the nation’s richest colleges could theoretically allocate more endowment income toward scholarships. The disconnect between soaring endowments and growing financial burdens on students fuels criticism that universities prioritize institutional wealth over affordability.

Constraints on Using Endowment for Aid

Why not unlock more of this money for need-based aid? Many gifts come with strict donor instructions—say, funding a named professorship or a new lecture hall—making reallocation legally or reputationally fraught. A working paper from the National Bureau of Economic Research found that wealthier universities increase financial aid only modestly despite growing assets. Development officers strive to secure unrestricted donations, but unrestricted gifts remain a minority. Redirecting funds away from donor-designated purposes risks alienating alumni and jeopardizing future philanthropy, cementing the status quo.

Governance and Potential Conflicts

Board composition at elite colleges often reflects their investment strategies. In 1989, just 17% of trustees at the wealthiest universities were industry financiers; since 2014, that share has stayed above 30% [verify]. Private equity and hedge fund managers not only guide endowment allocations but may also benefit from fee structures tied to performance. While disclosures mitigate legal concerns, critics question whether such relationships deepen the divide between well-endowed institutions and those with far fewer resources.

Rethinking Endowment Distribution

Some schools offer alternative models. Berea College in Kentucky eliminated tuition in 1892 by dedicating 5% of its endowment returns to cover costs, supplementing revenue with federal grants and student work programs. Its nearly $1 billion fund sustains operations for a small student body focused on affordability and community. Historically Black colleges, meanwhile, often have endowments under $200 million due to alumni wealth constraints, perpetuating intergenerational funding gaps. A collaborative endowment-sharing initiative—where elite colleges contribute a percentage of returns to under-resourced institutions—could foster wider access and equity in higher education.

Conclusion

Should elite universities leverage their financial firepower to broaden educational access, or is amassing wealth in pursuit of prestige justified?

• Encourage top colleges to allocate at least 5% of annual endowment returns toward need-based scholarships and partner grants for institutions with limited resources.