In recent years, members of Congress have begun questioning the size of endowments of some of the nation’s most prominent colleges and universities. For example, Harvard University has the nation’s largest endowment, which (based on 2015 figures) now tops $36 billion.
Unlike private foundations, which must distribute 5% of their assets each year, there is no legally required payout for nonprofit endowments. With educational costs soaring for most families, Congress is beginning to discuss the possibility of requiring the largest endowments to meet legally set guidelines for annual payouts.
This is a controversial topic and one worth investigating. Here’s the current reality for Harvard. The University enrolls about 6,700 undergraduates each year. Tuition, room and board at Harvard runs approximately $63,000. With Harvard’s current endowment, a required 4% annual payout would result in $1.44 billion. This figure would easily cover the tuition, room and board of every incoming Harvard student in perpetuity without ever eating into the endowment corpus.
In other words, Harvard could pay the tuition, room and board of every student from now until the end of time just from the investment earnings of the current endowment and never touch the $36 billion.
Food for thought. My suggestion? Colleges and universities with large endowments would be well served to rethink their payout policies before Congress gets involved in this issue.