The High Endowment Colleges/Universities: Do Their Students Benefit?
In my prior piece on education choices, I reviewed the college rating systems. My favorite was developed by The Economist. Unlike the others, it did not give the institutions being rated “credit” for innate student intelligence as measured by SAT scores.
In this piece, I focus on endowments and whether they affect what students are interested in: education quality and cost. Those with higher endowments could afford to provide a better and lower cost education. But do they? These “endowment effects” and related issues are addressed below.
There are huge endowment differences between colleges/universities. Consider first the institutions with the largest endowments. Table 1 gives the endowment data for the 25 institutions with the largest endowments having at least 1,000 students:
- Those with the largest endowments are in black,
- Those with the largest per student endowments are in green and
- Those with both the largest and per student are in red.
Harvard’s total endowment dwarfs all the rest. It is notable that Amherst and Williams, both with relatively small student bodies, also make the largest endowment list.
Table 1. – Colleges/Universities with the Largest Endowments, 2014
It is interesting to look more closely at the institutions with the largest endowments per student. A question that immediately comes to mind is how much of total college outlays do the endowment investment returns cover. According to the National Association of College and University Business Officers (NACUBO), the average 10-year rate of return on endowments greater than $1 billion has been 8.2%. Keep in mind that using this number should be quite conservative inasmuch as it includes the extremely unusual 2007-2010 period when the stock market lost 50% of its value.
IPEDS collects data on what it calls “core expenditures” defined as “…expenses for instruction, research, public service, academic support, student services, institutional support, operation and maintenance of plant, depreciation, scholarships and fellowships, interest and other operating and non-operating expenses.”
Table 2 shows what an annual return of 8.2% would provide along with the core expenses for each institution. The final column indicates the share of core expenses covered such an endowment return. The institutions where the return would cover more than 100% are shown in red. It suggests that Princeton, Pomona, Swarthmore, Amherst, Grinnell, Williams, and Berea could stop charging tuition and other fund raising efforts and still cover all costs from the endowment investment return.
Of course, they will not do it. They like to use “preferential pricing” meaning they want to charge what the “market will bear.” Among other things, this allows them to charge full costs for the well-off parents of alumni to let in their less well intellectually endowed children. In addition, an active alumni program provides a security blanket for anything that might happen.
Table 2. – Colleges/Universities with Largest Endowment per Student, 2014
But in the meantime, one wonders what these institutions do with their endowment income beyond reinvesting it. It appears that real estate is a popular choice. In the Boston area, Harvard got considerable negative press a few years back for secretly buying 50+ acres in a neighboring town. And over the last three decades, Boston University has purchased a large slice of Back Bay, much to the chagrin of Boston mayors.
Table 3 provides data on the physical properties (land, buildings, equipment) owned by the high endowment institutions. The overall average per FTE student is $105,680. This compares with $79,704 for 858 colleges/universities with IPEDS property data.
Table 3. – Physical Properties of High-Endowment Institutions
Do Students Benefits from Attending a High Endowment College/University?
There are two immediate ways from which students could benefit from attending the high-endowment institutions:
- A better education
- A less expensive education.
There is no definitive way to measure education quality. But in my latest piece on college ratings, I concluded that the method used by The Economist was best because it focused on the value added by the institution. For education cost, I use data collected by IPEDS on the average net price for full-time, first-time degree/certificate-seeking undergraduate students.
Table 4 provides data on these variables ranked by the Economist’s ratings of 1,275 institutions. Very few do well on both measures. Only Harvard and Stanford charge students with aid less than $20,000 and are ranked highly on education by the Economist.
Table 4. – Endowments, Prices and Ratings of High Endowment Colleges/Universities
When compared with the averages for all colleges/universities, the high-endowment group does not look good at all. The average charge after aid for all IPEDS’ institutions is $18,106 versus $21,777 for the high endowment group. That means that even with these huge endowments, they charge more for students with aid than do the average institutions. Further, according to the Economists ratings, the average education quality scores of the high-endowment group are not impressive (643 rank and 49th percentile)
Now, the measures employed above are far from perfect. Nevertheless, they do suggest the high endowment colleges and universities should take a careful look at their charges and the quality of the products they offer.
As Table 2 indicates, the average endowment returns of Princeton, Pomona, Swarthmore, Amherst, Grinnell, Williams and Berea cover more than their total costs. There is no reason that these institutions and others getting a large share of their costs covered by endowment returns should be charging aid-receiving students more than institutions with average endowments.
One suggestion would be for these institutions to pledge a certain percentage of their investment returns to an across-the-board reduction in student charges.
What to do about education quality is more problematic. It is quite apparent to people who have attended and taught at large universities that undergraduate students are something of an afterthought. There are increasingly taught by teaching assistants. And like the managers of large hospitals, there is little incentive for university “managers” to spend too much time working on how to provide better undergraduate education.
Nevertheless, one has to wonder down the road what these institutions are going to do with all their endowment monies. Like wealthy individuals, they have bought land and constructed more buildings. But there are limits on how far they can go with real estate. Maybe some of them will mimic the Gates’ of the world and start philanthropic organizations. In light of their questionable education performance, they might dedicate some income to trying to better it.