College Endowments Meet Shaky Markets

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Thirty-one private colleges have endowments of at least $1 billion, while 1,486 others have endowments of about $13 million, according to the National Association of Independent Colleges & Universities (NAICU).

Many of these schools use their endowment earnings to cover the cost of grants to students, money that has become even more important as federal grant aid is waning, according to David Warren, president of the NAICU. For example, the inflation-adjusted number for Pell Grants—a federal grant program funded by the U.S. Education Dept.—in academic year 2006-07 was $12.8 billion, down from $13 billion five years ago, Warren notes.

Offsetting Costs

With less federal grant aid, public colleges and universities turn, in part, to their endowments to offset the cost of tuition for students, a factor that plays less of a role at public universities, where a bulk of their operating funds come from state appropriations. Schools also are looking at cost cuts and other sources of revenue (BusinessWeek.com, 10/1/07) to keep tuition from rising even further.

"Certainly for some institutions that do have a significant endowment, that endowment does play a large role in subsidizing the price that students pay," says Donald Heller, a professor of education and senior scientist who is director of Pennsylvania State University's Center for the Study of Higher Education. "Without that endowment, students would be paying a lot more than they actually are."

Still, the fluctuations of the stock market are unlikely to have an impact on tuition costs at private colleges unless there is a continued economic downturn, Heller notes. Most institutions try to minimize the fluctuation in their endowment value by insulating their assets as much as possible from the ups and downs of the stock market, investing them in hedge funds and other vehicles—though it's not clear yet whether the subprime crisis is affecting college endowment holdings in those areas.

"The reality is in the short-term, a downturn in the stock market or other markets will have relatively little impact on the operating budget of a university," Heller says. "It will take a number of years of downturns before we start to see an impact."

Check out the BusinessWeek.com slide show for a list of the most expensive private colleges and universities.

Damast is a reporter for BusinessWeek.com.