Rising inflation, falling enrollment, fundraising challenges, and changes in federal funding have left institutions seeking increasing support from their source of perpetual capital: their endowment. The latest NACUBO-Commonfund Study of Endowments (NCSE), covering fiscal year 2025, shows that higher education institutions increasingly rely on their endowments to cover costs. Digging deeper into Commonfund’s proprietary benchmarking database, which covers 10+ years of data across Commonfund’s benchmark studies of higher education, independent schools, and private and community foundations, offers further insight into how institutions are drawing from their endowments.
This Commonfund Insights blog is the first in our Beyond the Benchmark series. It examines the effective spending rate, or the actual draw on endowment market value over the course of the fiscal year. More than 650 higher education institutions report these data each year and they are aggregated in the annual NCSE study. Future editions will cover trends across other market segments and longitudinal analysis of additional topics and questions covered in the studies.
Effective Spending Rates at Higher Education Institutions Have Risen Over Time
Spending policy, which sets how much an institution plans to draw from its endowment, is a critical topic for boards and investment committees and is covered extensively in the NCSE and in various Commonfund resources.1 Effective spending, by contrast, is the actual draw from the endowment over the year. The chart below shows effective spend rates for all institutions in the NCSE rising over the past decade, with the average across participants growing from 4.3 percent in FY16 to 4.9 percent in FY25 – a new all-time high.
This matters because endowment spending funds institutions’ core missions. In FY25, nearly half of spending policy distributions (47.4 percent) supported student financial aid, followed by academic programs and research (17.7 percent). To achieve intergenerational equity and continue funding these mission-critical needs over time, an investment committee typically aims to earn real returns that cover the spending rate plus the cost of managing the endowment, such as fees. The increase of more than 60 basis points in effective spending over the past decade raises that hypothetical real return target by a similar amount, and the nominal return needed is higher still once inflation – measured by CPI or the Higher Education Price Index (HEPI) – is included. This underscores the importance of tracking these data over time to assess whether current policies, practices, and investment strategies remain effective or warrant revision.
Key Insights about Data by Endowment Size and Type
- Despite the sharp dip in FY22, average effective spend rates have trended upward across endowment size cohorts, though to varying degrees. This mirrors the trend seen for total institutions.
- The largest point-to-point increase in average effective spend rates from FY16 to FY25 occurred among institutions with assets between $51million and $100 million, increasing from 4.4 percent in FY16 to 5.5 percent in FY25; followed closely by those with assets between $ 251 million and $500 million, whose average rates rose from 4.2 percent to 5.0 percent during that time. Cohorts with the most consistent rates over time were those with assets between $501 million and $1 billion and between $1 billion and $5 billion (each increasing by only 20 basis points on average).
- The relationship between endowment size and average spending rates has shifted over time. From FY16 through FY21, endowment size and effective spend rate showed a slight positive correlation, meaning the largest endowments spent at a higher rate than the smallest. That flipped in FY22 when the smallest endowments spent at the highest rate (5.2 percent) while the largest spent at one of the lowest (3.8 percent), on average. This correlation has remained slightly negative from FY23 through FY25.
- When looking at data by institution type, private college and university endowments have spent at higher rates than other institution types in every year of data collected. This likely reflects private institutions’ heavier reliance on endowment income to fund operations and financial aid, since they lack the state appropriations that cover some of public institutions’ costs.
- Private college and university endowments have also increased their effective spend rates over time more than any other type, except combined endowments/foundations. This group is typically the smallest cohort among respondents: in FY25, there were 375 private college or university respondents but only 31 combined endowments/foundations.
- Institutionally-related foundations (IRFs) and public colleges and universities have had relatively steady effective spending practices, staying within a range between 3.8 percent and 4.3 percent, on average, throughout the decade.
Conclusion
The past decade of NCSE data shows a clear trend: institutions are drawing more from their endowments. The increase is broad-based across cohorts, though its pace and pattern differ by endowment size and institution type. For boards and investment committees, the implication is material: a higher effective spend rate raises the return needed to preserve purchasing power and maintain intergenerational equity, particularly when inflation is elevated. Boards should consider benchmarking their actual effective spend rate, not just their policy rate, against peers of similar size and type, and test whether their return assumptions can sustain the level of draw required. Future editions of this series will explore these dynamics across other market segments.
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E.g. Is your Spending Policy Getting the Attention it Needs?, Aligning Spending Policy with Your Institution’s Goals | Commonfund, Investment Policy Statement: The Document Behind Every Decision