When looking into higher education, there’s a set of characteristics that are typically looked at when determining if they’re somewhere worth attending. These are things like graduation rate, acceptance rate, prestige, alumni, and an assortment of other factors. Something that’s not so commonly looked at, but most certainly should be, is the college’s endowment.
Endowments are financial assets created from donations that represent a pool of investments with low risk. It’s this pool of money that will allow the more benevolent actions by colleges to take place, things like public service missions, student aid, and fellowships. As a general rule of thumb, colleges that spend less than 5% of their endowment are at low financial risk.
This is because as a college dips into what is typically meant for charitable investments for necessary operations, not only does the endowment lose value, but the college is likely desperate for cash. This isn’t the only way to determine a college’s financial health, there are things like the financial responsibility composite score and tuition discount rates, but it’s certainly the most important.
When looking for endowment values and spending rates, there will either be pre-published information online, or an available-upon-request report. For those looking at prospective colleges, parents trying to make sure their kid is making the right choice, or just an interested member of the public. A college’s endowment rate is an essential part of understanding its health. See more about how and why colleges are going out of business below: