College Endowments Meet Shaky Markets

Once again, tuition costs outpace inflation. The question is, can big endowments continue to pay part of the freight?

by Alison Damast

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To no one's surprise, the College Board reported on Oct. 22 that tuition at public and private colleges for the 2007-08 academic year continued to outpace inflation. But this year adds a new wrinkle—how the recent market turmoil will affect college endowments.

For some of the priciest schools, the above-average investment returns in recent years—as the markets boomed and hedge fund investments soared—have helped take the edge off upward pressure on tuition. If those returns suffer, those relentless tuition bills could edge even higher.

For example, at Vanderbilt University in Nashville, the endowment—worth about $3 billion—contributed about $125 million to the school's operating budget in academic year 2006-07, paying for programs, financial aid, and endowed chairs for faculty, among other items, says Michael Schoenfeld, Vanderbilt's vice-chancellor for public affairs. "It lowers the cost of tuition, it's a fairly simple transaction," Schoenfeld says. "If we didn't have the payout from that endowment, the cost of educating students would not go down. It would have to be replaced somewhere else."

The majority of endowment funds are concentrated at a small number of elite institutions in the public and private sector, with the wealthiest 10% of colleges and universities holding the most assets, according to the College Board. Schools such as Harvard and Yale have multibillion-dollar endowments that are so high that some members of the Senate Finance Committee called last month for the schools to use more of that money to reduce soaring tuition costs.

Tuition Hikes

Anyone with college-age kids knows why costs are a hot-button issue. This year's College Board report shows hikes of more than 6% in tuition and fees for both public and private colleges. The increases are consistent with last year's, though the rate of increase at four-year public colleges is the lowest in five years. While the figures for tuition fees are the "sticker price" of a school, the cost of room and board and financial-aid grants means that what students actually pay is often much different.

The rising costs are driven by a variety of factors, from a slowdown of growth in the student financial-aid sector to flat or insufficient state funding at public colleges, said Sandy Baum, senior policy analyst at the College Board, during a press conference held in Washington, D.C., to release the findings. "There is no startling piece of information, but the data we have this year does confirm that the average price of college is continuing to rise more rapidly than the consumer price index and more rapidly than the average prices in economy," Baum said.

Public vs. Private Funds

Four-year public colleges have taken the hardest hit, with the rate of growth in tuition and fees this decade the highest it has been in 30 years. The average tuition and fees at four-year public colleges for the 2007-08 academic year are $6,185, up $381 (or 6.6%) from last year, the College Board said. Those numbers don't include room and board and other expenses, which add about $7,404 to the bill.

The consumer price index for all urban consumers rose 2.8% between September, 2006, and September, 2007.

Costs at private universities saw similar increases to those at four-year public schools. Tuition and fees for this school year averaged $23,712, a $1,404 (or 6.3%) increase over last year. University officials cited rising utility rates, health care, and workers' compensation costs among the reasons for the hikes.

This is the first year that the College Board included in its report a chart with the overall endowment assets of colleges and universities. The endowment is an important figure to keep in mind when looking at tuition because colleges tend to spend 4% to 6% of their endowment earnings as part of their annual budget, said Baum. Private four-year colleges and universities tend to have the lion's share of endowment funds, with overall endowment assets of $82,700 per full-time student, while public four-year colleges and universities have about $13,800 per student.