Colleges and Universities and Education Finance and Tuition Costs and Education & Workforce Development and Endowments

College endowments growing, but so is tuition

March 3, 2008

Endowments at Indiana colleges and universities are soaring, due in part to impressive investment returns in recent years.

The swelling coffers here and across the nation are stoking the debate over whether universities should be using more of their wealth to hold down tuition increases.

Schools typically spend 4.5 percent to 5.5 percent of their endowment balances each year, even as the endowments themselves sometimes grow at a far faster clip. Endowments at 795 schools tracked by the National Association of College and University Business Officers grew 21 percent in the fiscal year that ended June 30, 2007.

Major Indiana schools kept pace. Indiana University Foundation's endowment rose 22 percent, to $1.5 billion, and is up 50 percent from five years ago. The Purdue Research Foundation's endowment rose nearly 20 percent, to $1.8 billion. Five years ago, it stood at $1 billion.

With donations flat or down, universities are relying on savvy investing to generate most of their endowment growth. The Purdue foundation endowment, for instance, returned 19.4 percent last fiscal year, beating the 17.4 return for the S&P 500.

Critics believe that schools increasingly have the financial means to rein in or halt tuition increases. This school year, tuition at public and private universities increased an average of 6.6 percent, according to the New York-based College Board.

On Jan. 24, U.S. Sens. Max Baucus and Charles Grassley sent letters to 136 schools with endowments topping $500 million asking them to explain how they spend the money.

The list includes four Indiana schools--Indiana University, Purdue University, the University of Notre Dame and DePauw University--all of which say they plan to respond.

The intent of the 50-question letter is "to understand how schools use their endowments to bring down tuition," said Dan Virkstis, an aide to Baucus, a Montana Democrat who serves as chairman of the Senate Finance Committee. Grassley is the ranking Republican on the committee.

"The committee does not know if schools actually should use more endowment money to bring down tuition; but once they collect the data, they'll decide," Virkstis said.

Unfair criticism?

Schools counter that endowments are supposed to last forever and thus require prudent management. Further, they say, most donors place restrictions on their gifts that limit ways schools can spend the money.

Even so, they say they already spend large chunks of their endowment payouts--plus an even larger chunk of school funds--for student aid.

The NACUBO report, which was released the same day the senators sent their letters, has helped fuel the controversy.

The report noted that the average rate of return for all schools in the ranking was 17.2 percent.

Those upset about the national organization's report aren't considering all the facts, say school officials, who note that their investment results aren't always so robust. This year, in fact, many have seen results sag with the overall market.

"Yes, we have had a pretty nice run over the past few years," said Bruce Arick, vice president for finance at Butler University. "But in 2001, we lost 7 percent, 9 percent in 2002, and half a percent in 2003. In those years, there wasn't much hubbub from the NACUBO surveys or much talk about how large the endowments were."

Purdue's endowment paid out just under $61 million last year, more than one-quarter of which went toward student financial aid. The school spent another $69 million for scholarships and other aid.

"Are we making an effort [to make college affordable]?" said Morgan Olsen, executive vice president and treasurer at Purdue. "I believe absolutely we are. There's probably no limit to the good we could do. And one thing we're planning to do is raise additional endowments for scholarships."

Average tuition at a public university is $6,185 a year, according to the Chronicle of Higher Education. Tuition at a private school averages $23,712 a year.

Richest schools

Much of the national media attention has focused on a handful of elite schools with gigantic endowments. Harvard and Yale universities, for instance, together have $57 billion in endowment assets. The top 10 schools in the ranking accounted for more than one-third of the $411 billion in endowment assets reported by all 795 schools.

Notre Dame, at $6 billion, was the highest-ranking Indiana school, at No. 14.

Many families can't consider such private institutions because of cost. But a bigger problem is making sure that state schools aren't beyond reach, too, according to The Lumina Foundation, an Indianapolis not-for-profit whose mission is to increase access to higher education.

"The cost we're concerned about is not how much it costs to go to Notre Dame, but to Ball State or IU or IUPUI," said Dewayne Matthews, senior research director at Lumina.

"Those schools are serving the large numbers of low-income folks. It boils down to the question: What are the needs that they have as a publicly chartered institution? No, the state Legislature should not tell them what to do. But they do have an obligation to think hard about this and recognize that the markets have been kind to them over the years."

School officials say they do think hard about this issue.

IU's endowment returned 21.5 percent in its latest fiscal year. It paid out $70 million over the course of the year, one quarter of which went to financial aid for students. Additional aid paid by the school totaled $53 million.

The Ball State University Foundation earned 17.9 percent, boosting assets to $198 million. The endowment paid out $7.7 million, with more than $2 million going to financial aid. BSU kicked in another $29 million for aid from its budget.

School officials in Indiana say the recent hubbub regarding endowment wealth is just another round of finger pointing.

"We are expensive. It isn't cheap to run a university," Butler's Arick said. Even so, he said, families simply aren't saving enough for college. They think, "It's almost a birthright that my kid is going to college and we'll figure out how to pay for it when we get there."

At most Indiana schools, the amounts paid to students for financial assistance far exceed the revenue collected from tuition and fees. Yet, at the same time, endowments keep growing.

And that's as it should be, school officials say, since the endowments are supposed to continue into perpetuity.

"Is there an upper limit of, is there too much?" asks IU's chief financial officer, Jim Perin. "No, there isn't."

Added Purdue's Olgen: "Forever is a very long time."

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