Princeton President Christopher Eisgruber defended the university’s $34 billion endowment and pushed back against what he calls damaging — and potentially destructive — misinformation about its purpose and function in his annual letter.
In the nearly 5,000-word letter outlining the university’s upcoming projects and initiatives, Eisgruber took some time to warn that the endowment faces “worrisome taxation proposals that result partly from misunderstandings of what endowments do.” As he explains it, people “assume that an endowment is like a savings account” that universities can “dip into” when the need arises.
“An endowment is nothing like a savings account,” Eisgruber wrote. “It is more like a retirement annuity that must provide income every year for the remainder of the owner’s life.”
Princeton’s endowment underpins the university’s operations, from funding financial aid and graduate stipends to supporting faculty salaries, research, and campus upkeep. As Eisgruber explained, Princeton’s endowment covers over two-thirds of its annual budget, with a 5.4 percent payout this year. Its purpose is to sustain the university’s core operations indefinitely, which is why the university can’t “simply ‘dip into the endowment’ to pay for new initiatives.”
This fundamental misunderstanding may have led to the Tax Cuts and Jobs Act of 2017, which imposed a 1.4 percent tax on endowment investment earnings. There is now discussion about increasing the tax even more, with one proposal raising it to 21 percent. Eisgruber argues that “a larger endowment tax would damage higher education and our country.” (This is on top of the White House already targeting endowments for D.E.I. efforts.)
Eisgruber explained that Princeton’s endowment-driven budget relies on long-term financial planning to manage market fluctuations. The university’s 46.9 percent return in fiscal 2021, driven by the post-pandemic rebound, was followed by two years of losses and a return below 4 percent last year.
“The swings during this four-year period were extreme, but our financial planning anticipates significant volatility,” Eisgruber wrote.
Princeton’s endowment returned 3.9 percent for fiscal 2024, the lowest among Ivy League peers, due to an overallocation to venture capital and emerging markets and insufficient exposure to surging tech stocks. While long-term performance remains strong, declining donations and market challenges could impact the university’s financial aid funding.
Despite this volatility, Princeton budgets for an average endowment payout of about 5 percent, even in down years. Princeton argues that treating the endowment as an easily tappable resource would erode its ability to fund the university’s core mission over time.
“To state the obvious: absent additional fundraising and investment income, if we expend an amount equal to 5 percent (or more) of today’s endowment value year after year into the future, then the entire university endowment, no matter how large, will be gone in 20 years or less,” Eisgruber wrote.
