On Tuesday, September 30, 2025, and Wednesday, December 3, 2025, campus leaders sent financial updates to Yale faculty and staff. The following FAQs supplement these messages and provide additional background information.
Can you explain how the university endowment works?
The endowment is a collection of gifts given to the university over time, for a specific purpose and over a broad time horizon. The majority of the gifts are highly restricted, as determined at the time the gift was received. The principal is invested and only the income is spent.
The endowment is the university’s largest revenue source. Each year, the investment returns on Yale’s Endowment fund one-third of the university’s total operating budget and nearly two-thirds of the budget outside the medical school, supporting critical priorities including student financial aid, faculty teaching and salaries, and scholarship and research.
For more information, including a video explaining how the endowment works, please visit Overview of Yale’s Endowment.
Why can’t Yale spend more of its endowment to get through this financially challenging period?
Yale already spends from the endowment at a rate estimated to make the university sustainable over generations. To achieve this level of financial stability, Yale aims to spend 5.25% per year from the endowment, which means that over the course of a decade, the university spends more than 50% of the endowment’s market value.
Yale’s endowment spending policy—and the 5.25% target spending rate—is designed to achieve “intergenerational neutrality”—that is, to spread the benefits of university investment returns equally over the current and all future generations. The goal of our spending policy is to support the Yale of today and the Yale of tomorrow.
More information about the spending policy is available online. For an overview of Yale’s endowment, including FAQs, please visit Overview of Yale’s Endowment.
Can you explain why the 8% endowment tax has a 12.5% impact on Yale’s spending from the endowment?
Because of how the tax is calculated, the impact on the university’s budget will be a 12.5% reduction in the money available for activities funded by the endowment. A brief explanation follows.
First, the university estimates that the Yale Endowment will generate an annual return of roughly 8.25% over the long term. Each year, the return fluctuates; it might be higher or lower. This is a long-term average.
Each year, the university must set aside 3% of the endowment return to account for inflation. This keeps the purchasing power of the endowment constant over time. Yale spends the remaining amount of the return, 5.25% (8.25% minus 3%), annually. This currently amounts to approximately $2.2 billion in annual spending. This endowment spending is the largest source of revenue in the university’s budget.
The 8% endowment tax is assessed on the 8.25% annual endowment return, but this tax expense must be paid for by the 5.25% that Yale can spend from the endowment each year. The expense cannot be paid for by the 3% set aside for inflation. The 8% tax on the money earned from the endowment (8.25%) equates to a 12.5% impact on what Yale can spend (5.25%) from the endowment each year:
8% tax x 8.25% return ÷ 5.25% spending rate = 12.5% of endowment spending
Why isn’t Yale adjusting its spending policy or smoothing rule?
The smoothing rule is designed to prevent market volatility from hurting our long-term ability to advance Yale’s mission. Nothing about market volatility or the need to cushion the budget from it has changed, so we do not plan to change the spending rate or the smoothing rule.
The tax on endowment income does not impact Yale’s ability to spend from the endowment. The target endowment spending rate remains 5.25%.
The tax is an expense. It impacts what the spending from the endowment is used for. In this case, more of the spending from the endowment will need to go to the federal government, and less will be available to spend on mission-based activities such as financial aid, research, teaching, and practice. The tax impacts the accessibility and affordability of a Yale education.
If the university has a surplus again in future years, why can’t that surplus cover the cost of the endowment tax?
First, it is essential to note that the surplus is a one-time occurrence, whereas the endowment tax is an ongoing and annual payment.
Second, most of the surplus is distributed across individual schools, units, departments, labs, and programs, and a significant portion is subject to legal restrictions that would prohibit its use for this purpose. Additionally, only some of the surplus is in units with endowment income. In these cases, if schools or units can demonstrate they have sufficient revenue to cover the cost of the endowment tax, they may be able to cushion the impact. However, most schools and units will need to make significant adjustments.
The surplus cannot cover the annual cost of the endowment tax.
Will the endowment tax still apply in years when the endowment doesn’t make or lose money?
Yale may still pay tax even during years when its endowment experiences overall losses. The tax is calculated based on net investment income—including interest, dividends, royalties, capital gains from asset sales, and other sources of income. Therefore, if Yale realizes profits from specific investment transactions in a year when the endowment’s overall value declines, the university may still be subject to the tax.
Will there be layoffs?
As noted in the December 3, 2025 budget update, nearly two-thirds of the university’s expenses relate to compensation and benefits. Unfortunately, this means several units may need to meet their budget targets by reducing their workforce. We are hopeful that most reductions can be accomplished by eliminating open positions and through regular turnover and retirement incentives. School and unit leaders are seeking to achieve savings in this way, actively considering how the recent ninety-day hiring pause, retirement incentive, and the three-year timeframe for achieving new budget targets provide additional opportunities for efficiencies and savings. In some units, even after these reductions, layoffs may be necessary, but university leaders are working hard to minimize them wherever possible. We hope to substantially complete any downsizing efforts by the end of calendar year 2026, provided there are no additional significant financial changes.
What retirement options are available?
On September 30, 2025, the university announced a retirement incentive for eligible managerial and professional (M&P) and command staff. More information about this program is available on the It’s Your Yale website. The election window for the program concludes on December 31, 2025.
Yale’s existing contracts with Local 34, Local 35, and the Yale University Security Officers Association (YUSOA) also include a union retirement incentive program. More information is available through the Employee Service Center. Yale continues to offer a phased retirement program for faculty, and plan documents are available online.
What principles are guiding university leaders, schools, and units as they make budgetary decisions?
How is Yale providing guidance to the research community?
Information and guidance for researchers and research staff can be found on the Research Guidance webpages (net ID and password required).