The Real Story Behind That Big Pot of Money

College endowments have been in the spotlight recently — and for good reason. The major tax overhaul enacted by Congress last July is changing how many higher education institutions will manage and plan for the future. The renewed attention has also surfaced plenty of questions and misconceptions about what a college endowment actually is and how it works. To help clarify, editor Stacey Himmelberger P’15,’22 sat down to chat with Karen Leach, Hamilton’s senior vice president for administration and finance.

Karen Leach senior vice president for administration and finance Karen Leach, Senior Vice President for Administration and Finance

Let’s start with the basics. What is the endowment?

Hamilton’s endowment is a pool of capital built over time largely from gifts to the College that get invested. It’s made up of over 1,400 individual funds, most of which have been designated by the donor for specific purposes. For example, about half of them are designated to support financial aid. A combination of returns and sometimes gains [from those investments] are what we use to fund financial aid and other College programs. The endowment [which is approaching $1.6 billion] provides more than one-third of Hamilton’s annual operating budget.

How do you determine how much comes out of the endowment each year?

Generally, we draw between 4 and 5% — about $60 million this year. The idea is that the endowment investments gain, on average, 8% per year. So we take out 5% and leave 3% in order to grow it and keep up with inflation, ensuring purchasing power for future generations.

The actual numbers are more nuanced than that, but the point is to guarantee that future Hamilton students are supported at least as well as today’s students. We expect the College to go on in perpetuity, and donors give Hamilton the money with the sincere intent that it will support the program or scholarship they set up forever. People use the word “prudent” financial management in reference to the endowment. That means acting with care, skill, and good judgment using a level of diligence that a reasonable and informed person would exercise when managing someone else’s assets for long-term purposes.

More specifically, we use one version of a smoothing formula originally developed by Yale University. What it does is take 70% of the prior year’s spending, adjusted for inflation, and blends that with 5% of the average endowment value over the previous four quarters weighted at 30%. This approach stabilizes annual budgets by reducing the impact of inevitable market swings. In theory, endowment spending could go down when the market goes down, but the smoothing rule helps prevent that.

In my 24 years at Hamilton, the total endowment spending has never gone down. It grows by a smaller or larger amount from year-to-year, but endowed programs can generally continue without big disruptions even if there is stock market volatility. The smoothing formula also means the endowment spending doesn’t shoot up when the market has a big surge. Moderating the ups and downs helps Hamilton stay financially stable over the long run.

I once heard someone describe the endowment as a giant rainy-day fund. Is that a misconception?

It is. Since most of the funds that comprise our endowment are restricted for specific purposes, the College cannot spend down the endowment like you would a personal bank account, even if what you want to fund is a legitimate priority. The restricted funds have to be maintained.

In full transparency, there’s a portion of the endowment called quasi-endowment, funds that the Board of Trustees decided to add to the endowment over time. Those dollars, about 20% of the endowment, could, in theory, be spent. But, the operating budget would suffer because those funds would no longer be earning nor providing income for financial aid and operations. Schools don’t generally touch quasi-endowment unless they are in financial distress. We hope we never reach that level of distress at Hamilton. That’s why we are careful in managing the fund.

But $1.5 billion is a huge amount of money. Why doesn’t Hamilton just take more out each year and cut tuition?

If you consider the $60 million we drew from the endowment last year, that averages to about $30,000 for every student. So all students are already getting huge support from the endowment, and the amount of support from the endowment grows every year. Why don’t we take more? Think of it this way — people who are retired and have retirement funds can only draw so much out each year because it has to last them for the rest of their lives. Our endowment must provide financial stability over the very long term, for hundreds of years into the future. That’s why the primary objective in managing the endowment is to achieve a total return that, in addition to providing annual income to support the College, preserves the real value of the endowment in perpetuity.

How does the endowment support students and faculty on a daily basis?

“There’s no question that our endowment allows us to do more, and I don’t think that’s a luxury. I think it provides the resources that increase our quality.”

Endowment funds support a broad range of things like financial aid, professorships, student research and internships, our physical plant, guest lecturers, the Outdoor Leadership Center, science equipment, the choir tour, Levitt Center programming — the list goes on and on. We couldn’t offer the programs and experiences we do without those funds. We’d have to raise tuition or not do things. So on a daily basis, [the endowment] allows many special programs to occur, and it also allows our general operations to go on, because some of the money that comes in from the endowment is for general purpose use.

There’s no question that our endowment allows us to do more, and I don’t think that’s a luxury. I think it provides the resources that increase our quality. The endowment provides a third of our income. What if we had a third less resources available for our students? I think [the Hamilton experience] would be quite different. And it’s not just the tangible resources. You can map it to graduation rates — more resources mean smaller classes, more faculty and staff supporting students, and so forth. The lower your student-faculty ratio, the more personal attention a student receives, the better chance that student has of graduating. I believe that the kind of high-quality education that Hamilton provides comes from the endowment. And the support for financial aid allows us to admit the students we want at Hamilton to create a vibrant, interesting, and dynamic academic and residential experience.

If some of the endowment is for general purposes, what’s the difference between that and the Hamilton Fund?

Like I mentioned earlier, the majority of the endowment is restricted for specific purposes. Just because Hamilton has a healthy endowment doesn’t mean we don’t rely on annual gifts from alumni, parents, and friends. The Hamilton Fund accounts for 4% of our operating budget, or about $7.4 million a year. These unrestricted gifts allow us to act in the moment — they pay our heating bills and allow us to upgrade lab equipment or send students to a professional conference, in addition to supporting things that are not fully endowed, like financial aid, faculty support, or athletics.

How is the endowment managed on a day-to-day basis? Who oversees investment decisions?

We have an office in New York City headed by Lauren Jacobson, our chief investment officer. She works primarily for the Investment Committee of the Board of Trustees chaired by Bob Delaney [’79]. It’s their job to invest the endowment by sourcing and vetting high-quality investment managers across domestic and international equity, fixed income, real estate, commodities, hedge funds, private equity markets, and market indices. They then decide what portion of the endowment to allocate to each manager. They are constantly tracking performance and trying to find new managers as our endowment grows; you don’t want to put it all in one bucket. And then they send us quarterly payments to support the College.

Some see investments as one way the College can express its values on global issues such as sustainability. What’s your perspective on divestment as part of that effort?

The role of the Investment Committee is foremost to serve as a fiduciary: to maintain the purchasing power of the endowment by investing to maximize long-term returns while at the same time providing income to support the educational mission of the College. People forget that we are a charity and that people give their money to Hamilton not for some other purpose, but to educate our students. That said, as an academic institution committed to active citizenship, the College does take ESG [environmental, social, and governance] issues into consideration when they interview managers.

Recent tax and policy changes — like the One Big Beautiful Bill Act — have focused attention on college endowments. How have those changes affected Hamilton?

Since 2017, we’ve been required to pay an endowment tax. Last year we worked with a group of colleges and universities to advocate for those institutions with enrollments of fewer than 3,000 students to be exempt from the tax. And, in fact, [lawmakers] voted that in, so we no longer have to pay an endowment tax. That money now goes back where it should be: into the endowment. We need it there to avoid eroding purchasing power for all of the financial aid, professorships, and programs it supports.

There were many other changes that came up in the government discussions, and some impacted us. We lost some federal grants that faculty had for research, about $300,000. Some generous donors stepped in to help bridge the research expenses, and we’re trying to support those faculty as best we can so that they can continue their work. Our faculty also routinely include students in their research, so it’s important to the student experience and future careers.

We don’t have a huge amount of federal support, at least not compared to the overall size of our budget. But, of course, every dollar is important for us. We get federal money to support student workers, and our students take out loans through the federal student loan program. Plus, students from families with modest incomes get Pell grants, which are really important. We’re hoping there won’t be a lot more change.

We have something to be proud of in American higher education, and Hamilton is an important part of that story. My hope is that we approach future policy and funding decisions with care so we preserve the quality, access, and impact that alumni value so deeply.

During the negotiations, you went to Washington to lobby with the Small College Coalition. What was that like?

It was actually really interesting to go to different offices and talk to staffers — usually not to the elected officials themselves. I had no idea [the Capitol] was so huge. I logged 20,000 steps in one day! It was a great experience. It feels like making sausage to me because you don’t know what’s happening behind the scenes. You have the conversations, and [staffers] ask good questions. We had a chance to tell them why the endowment is so important and why it should not be taxed. It’s hard in the moment to know if you are having any impact, but I am glad we did it.

Looking ahead, what’s the biggest challenge you see in managing the endowment for the next generation of Hamilton students?

The challenge will be to build [the endowment] enough to support what the world needs in the future from a college like ours. We’re in the middle of a planning process, and while we don’t know exactly what our initiatives will turn out to be, we will need new endowment income to pay for those because we have to be mindful about how much we raise tuition.

Endowing a Fund

Hundreds of Hamilton alumni, parents, and friends have generously endowed funds that support our students, honor our faculty, establish new programs, and enhance the beauty of our campus. In so doing, they have established legacies that enrich Hamilton and honor their affection for the College.

Learn more about funding opportunities.

Remaining need-blind in admission will be a huge challenge. It’s a commitment we believe in, and it places us in a very special place. We can admit the students we want to admit regardless of their financial circumstances — the best students who are going to be the right people for Hamilton. But the need for financial aid is growing faster than we can grow tuition. That will be our number-one challenge.

I always say that our job would be easier if more people could just meet our students. They are so amazing that you can’t help but think you’re doing something special for the world by supporting them. They’re so earnest and kind and thoughtful. I see them mature and become even more thoughtful over their time here. I truly believe that so many of them will make an impact when they leave Hamilton. Their stories and aspirations are just so powerful. We are able to bring together people from all different backgrounds to live and study. We give them the tools to learn to solve the world’s problems, and they have a better chance of solving those problems because they’re learning from excellent faculty, dedicated staff, and from each other.

Posted March 1, 2026

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