In early March, Columbia University encountered a significant setback as the Trump administration announced the cancellation of $400 million in grants. This decision arose from the university’s handling of pro-Palestinian protests that took place the previous year.

The federal government outlined a list of demands that included actions such as suspending or expelling students involved in the demonstrations. In response to these pressures, Columbia conceded to certain federal demands, although the government has indicated that these concessions are merely the “first step” towards restoring funding.

Currently, numerous vital medical and scientific studies at Columbia are stalled due to the withheld funds, and requests for comments from the Department of Health and Human Services went unanswered.

The university is facing increasing scrutiny from various critics, who contend that Columbia should utilize its substantial endowment to overcome this financial gap rather than acquiescing to federal pressure. A recent op-ed in the New York Times highlighted this sentiment, illustrating the situation with an image of a broken piggy bank.

Columbia University boasts an endowment valued at $14.8 billion, making it the 12th largest among U.S. universities, according to data from the National Association of College and University Business Officers (NACUBO) and Commonfund. This study reveals that out of 658 surveyed institutions, the total endowment amounts to $873.7 billion, with a disproportionate concentration of wealth: 86% is held by just 20% of the universities surveyed.

Columbia’s financial resources, while sizable, yield an average of nearly $500,000 per student, a stark contrast to the University of Texas, which, despite a larger endowment of $47.5 billion, has less than half that amount per student.

Moreover, the composition of endowments varies significantly, with many affluent institutions, including Columbia, investing in illiquid assets. For instance, Columbia’s endowment comprises 31% global equities, along with 26% in private equity and 12% in real assets, while only 2% and 1% are allocated to fixed income and cash, respectively. The remaining 28% is distributed among absolute return strategy funds, some of which are also illiquid, based on audit documentation.

It is crucial to understand that university endowments are not simply reserve funds. Typically, they consist of numerous individual funds, many of which have specific stipulations set by donors for designated purposes like scholarships or research. Scott Bok, the former chairman of the University of Pennsylvania, noted, “Most of that money was put in for a specific purpose,” emphasizing that universities often cannot reallocate these funds at will.

Traditionally, universities have adhered to guidelines that only allow for 5% of an endowment to be spent annually, a practice rooted in the intention to preserve the principal amount. Economists like Morton Schapiro have indicated that while many funds are donor-restricted, some are not entirely out of their institutions’ control, allowing for potential adjustments in spending.

Despite this, there remains a reluctance among universities to draw down endowments during challenging times. Kimball, an education historian, argued that utilizing endowment funds for short-term fixes is often imprudent, comparing it to taking money designated for future expenses and using it to handle current financial situations.

The uncertainty surrounding the reinstatement of federal funding looms large over Columbia, while broader financial challenges threaten many educational institutions. For instance, the National Institute of Health has announced a cap on indirect cost reimbursements that will impact research funding by 15%.

Further complicating this landscape, proposed legislation in Congress seeks to alter the endowment tax, which currently applies to only 50 universities. One proposal aims to raise the tax rate from 1.4% to 21%, while another seeks a lower 10% rate with a reduced endowment threshold. Such measures could encompass more universities, increasing their financial burdens.

Additionally, many colleges rely heavily on revenue from international students, who usually pay full tuition. A recent decline in international applications signals potential issues for future income, adding to the financial storm brewing for these institutions.

Experts like Bok and Schapiro indicate that reliance on endowment spending as a solution for financial crises may only delay overarching issues. While donor contributions can offset financial gaps during crises, fundraising efforts are often more effective when aimed at future prosperity rather than immediate rescue efforts.