University endowments are under fire - here's how they work

HANNAH WEAVER, HOST: University endowments have come under political fire lately under the Trump administration. These funds help universities pay for scholarships, research, even campus maintenance, but how they work is often misunderstood. Our reporter, Caroline McCarthy provides this explainer. 

CAROLINE MCCARTHY, BYLINE: I got an email from my dad a few months ago. He was frustrated with my little sister’s college after she was unable to register for her fall semester classes due to a clerical error. I asked him to read it to me: 

JAMES MCCARTHY: I called the office today, everyone is MIA. In an unrelated story, the university received $210 million this year in federal funding, has a $2.7 billion endowment and is among the top 20 expensive schools for tuition, and still no one can speak to a parent except a poor sophomore who gets phone duty. These are the things that make people nuts. Love dad.

CAROLINE MCCARTHY: Why this was my problem? I don’t know. But it did come right after President Trump cancelled $400m in federal grants to Columbia University, where I’m currently getting my Master’s Degree. 

And, by the way, my dad isn't just a disgruntled parent. He's a lawyer and business-law professor at Felician University in New Jersey. It made me wonder - if he doesn't understand endowment spending, do other parents? I did some digging - And I found out the answer is…often, not really. I wanted to find the disconnect - But first, I had to figure out what exactly they didn’t understand. So I had a more in depth conversation with my dad. 

JAMES MCCARTHY: Let me put some context around this email. This was a, consumer who was getting a little bit less customer support than you may have expected.

Universities in my eye are businesses they. Have a product that they charge for. They employ people to provide the service and they compete for market share. But at the same time, they also have a mission for education. You and I, Caroline, are both Jesuit educated people and the mission of education and service to others is primary. So when I wrote this email, what I was thinking about was how to first off, how to get my daughter some attention to get her classes for senior year and second that I was having trouble getting anyone's attention. And that just drove me nuts.

CAROLINE MCCARTHY: And there are so many other people who feel like this - but there’s a disconnect. Many believe universities can rely on their endowment fund or other revenue sources, even with zero federal funding. I found a lot of these comments on Yahoo News and articles on Fox. 

Comment 1: "we should not fund ivy league colleges. Those scientists that want to do research should go to companies outside of academia and get real jobs to do research.

Comment 2: "They received a lot of funds from other sources and were able to do it all before tax payer money so they will do just fine without it."

Comment 3: "Tax payer's money should not be used to support universities where they indoctrinate students."

CAROLINE MCCARTHY: So we keep bumping into this misconception that when federal funding is removed, universities can sustain themselves through their endowments. But these funds aren't just in a piggy bank that universities can spend as they see fit. I asked Katharine Meyer, a fellow at the Brown Center on Education Policy at the Brookings Institute, to explain - what is an endowment?

KATHARINE MEYER: So an endowment is in the simplest of terms, . Very dedicated savings account that a university has where there's a lot of money in it, but a lot of it is earmarked for specific programs, whether that's a professorship, specific staffing needs or a large amount of it is really dedicated towards specific financial aid and scholarship programs.

CAROLINE MCCARTHY:Like the Tribal Scholars Program for students studying agriculture or TEACH grants for aspiring teachers who agree to work in high-need areas. Meyer says universities typically only want to use between 5-10% of their endowment each year. They want to leave the majority to accumulate growth. But in times of financial hardship, like the Great Depression or the COVID pandemic, they might use more and plan to raise money to replenish it the following year.

Meyer: Again, some of that for the very specific purposes that it's been set to. And then a little bit amount of amount, the endowment for just general operating, uh. Needs for any sort of additional scholarship [00:05:00] amounts,

CAROLINE MCCARTHY: But with the Administration slashing billions of dollars in academic funding, shouldn’t this qualify as one of those emergency times when schools can spend the money they want? I asked Roger Lewis Geiger, Distinguished Professor of Education at Penn State University. 

A big question I've been having in this is, you know, if I were to give a gift to the school I give. $800,000, to put into the endowment fund as a journalism scholarship, but you have to be a journalist from my hometown. But say they used my donation and the interest that that donation accrues for something else, they use it for. Uh, an athletic scholarship instead. Is that illegal?

ROGER LEWIS: Would be illegal because you would've signed a document and the university would've accepted, uh, this document that the, the, that this money was going to be used for certain purposes. And if you then found out that it was being used for other purposes, you could ask for your $800,000 back.

CAROLINE MCCARTHY: But that, would that be the extent of, the ramifications of that? There's no other consequences.

ROGER LEWIS: Well they don't go to jail or anything. It can get very, very complicated. This has happened, um, on a number of occasions.

CAROLINE MCCARTHY: Like in the eighties, when a family agreed to provide hundreds of thousands of dollars to cover tuition for nursing students at the University of Bridgeport in Connecticut. The school later shut down their nursing program and spent the money elsewhere, and the family sued. And lost.  This year, there’s a different lawsuit happening - colleges and universities are suing the Trump Admin to restore federal funding. So that they won't have to tap into their endowments. 

Caroline McCarthy, Columbia Radio News.