The Indiana University endowment: the lifeblood of IU
“The endowment” is a collective term used to encompass thousands of endowed accounts created by donors to provide long-term, sustainable support for IU’s mission of teaching and research.
As dedicated stewards of the endowment, the IU Foundation is responsible for maintaining and growing the funds that donors have entrusted to us. Our charge is to ensure that the endowment will be here for the benefit of IU students, faculty, research, and programs—now and forever.
How the endowment works
To understand how a university endowment is utilized and managed, it’s important to first know: Where do endowment funds come from?
A donor (or group of donors) wants to make a long-lasting gift to something at Indiana University that they really care about. So they create an endowed account—a permanent source of funding that can grow over time and support the donor’s chosen program or purpose for future generations.
The donor works with the IU Foundation to create a legally binding donor agreement, which spells out exactly how funds from that endowed account can be dispersed, now and into the future.
The IU Foundation pools all the individual endowed accounts into one portfolio. These funds are prudently invested with the long-term objective of maintaining purchasing power over time. Each account, while invested in the comingled portfolio, is its own line item and has its own cash flow that remains with that account.
The IU Foundation pays out 4.5% each year, making these funds available to the university beneficiary selected by the donor.
The principal of the original gift remains intact, generating benefits for the donor’s chosen cause for generations to come.
“Why don’t you just use the money in the endowment to pay for [insert cause here]?”
It’s a question we’re used to hearing, and we understand why people ask. University endowments are complex—and often misunderstood. Here are some of the questions we field most frequently.
The endowment is made up of donations from alumni, foundations, and friends of the university, as well as returns on the investment of those gifts. No tuition or state funding goes into the endowment.
Each year, a percentage of the endowment is paid out to the university. Donor agreements direct where the money goes. IU donors have supported thousands of different scholarships, programs, departments, faculty positions, and more.
The donor(s) who made the original gift decided what their endowment will support, from the time of the gift being made and forever thereafter. The IU Foundation is legally bound to honor donors’ intent.
In many ways, the IU endowment does reduce tuition, by paying out an annual disbursement to the university to support scholarships, student programs, department budgets, faculty, research, and other causes that donors have specified.
However, the endowment is not an account that the university can draw funds from at any time for any purpose. The university endowment actually comprises thousands of endowed accounts, approximately 98% of them restricted—meaning those accounts can only be used as directed by the donor.
The endowment is meant to last forever, so the value of the endowment needs to grow over time to keep pace with inflation while continuing to provide a similar level of benefits into the future.
In simplistic terms, if the price of books, rent, electricity, and other expenses doubles over the course of the next 20 years, the endowment value needs to be twice as large for the annual 4.5% distribution to cover those costs in the future.
The IU Foundation invests the gifts we receive from donors in a diversified portfolio, with the goal to provide maximum financial return given a prudent level of risk. The IU Foundation aims for an 8% return (or “hurdle rate”) on investments each year, and the endowment pays out 4.5% of its value each year.
The IU Foundation strives to maximize returns within acceptable risk levels. In order to maintain purchasing power of gift endowments over time, the Foundation strives for an annual return rate of roughly 8%, and the endowment pays out 4.5% annually.
If the endowment were to earn 8% annually and pay out 8%, the real value of the endowment would erode over time because of price inflation, and the benefits provided in future decades would be diminished relative to today’s levels.
One of the biggest misconceptions about public universities is that state funding, along with tuition, fully covers all operating expenses. While this may have been true generations ago, it’s simply no longer the case.
What’s more, an endowment is what propels a university from good to great, adding support beyond basic funding that enables people and programs to truly innovate and excel.
Even with endowment support and funding from the state of Indiana, IU must fund the majority of its operating expenses from other sources, including tuition, federal grants, and charitable gifts from alumni, parents, and friends. Thus, the world-class education and research that IU provides remain largely dependent on private support, which is why we continue to ask for your help.
Indiana University Foundation resources and social media channels
The Indiana University Foundation solicits tax-deductible private contributions for the benefit of Indiana University and is registered to solicit charitable contributions in all states requiring registration. For our full disclosure statement, see go.iu.edu/89n. Alternative accessible formats of documents and files on this site can be obtained upon request by calling us at 800-558-8311.