Urban Wire Endowments Won’t Solve College Affordability Problems
Sandy Baum
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As a new college year begins, public attention will likely return to how students and families will pay the bills while tuition prices continue to increase. Many will ask why colleges charge so much when they sit on large endowments, some of them worth many billions of dollars.

But endowments do not hold the answer to broader college affordability problems. More understanding about the financial wealth of colleges and universities might help direct both commentary and public policy in more constructive directions.

A Google search for “college endowments” points to rankings and articles that often focus on the richest schools. Harvard University’s $36 billion endowment is the largest, followed by Yale University’s at $25 billion and the University of Texas system’s at $24 billion. An annual study of endowments found that they generated an 8.2 percent return in 2018.

It’s easy to wonder why anyone has to pay tuition at all, given the amount of money floating around this industry. But most colleges and universities—even those in the private nonprofit sector—face an entirely different situation than those often in the spotlight.

How big are most college endowments?

Federal data from institutions include the values of 890 endowments of private nonprofit colleges and universities at the end of the 2016–­17 academic year. More than one-third of these institutions hold endowments smaller than $30 million, and 587 institutions (66 percent) have endowments smaller than $100 million. Six universities have endowments larger than $10 billion, and 55 (6 percent) have endowments larger than $1 billion.

Thirteen of the 890 institutions hold half of the total endowment assets in the sector. One institution holds 10 percent of the total. The median endowment in the sector is $52 million.

It is a legal obligation to preserve the principal of much of the funds in these endowments. With an average 5.8 percent return and an average 1.8 percent inflation rate over 10 years, that leaves 4 percent for institutions to spend.

Sixteen private nonprofit colleges and universities can spend as much as $30,000 per student per year in endowment income. But given their enrollments, half of the 890 institutions can spend less than $1,000 per student per year from their endowments.

What do endowments support and how much revenue can they provide?

Endowments support a wide range of activities including active research agendas, graduate study, and community enrichment activities in addition to undergraduate education. Many question whether wealthy institutions are doing enough to enroll and support low-income students.

High-endowment institutions tend to enroll smaller shares of low-income students than institutions with lower resource levels. But the low- and moderate-income students who do manage to get into these colleges and universities pay much less  than they would if they went to other places—including the local community college.

Asking whether these schools could do more to spread opportunity is important, but half of the students in the private nonprofit sector attend institutions with endowments that can  provide less than $1,300 per student per year; only 12 percent are at institutions that can add $10,000 or more from endowment income to their annual budgets.

Endowments are smaller in the public sector but are similarly concentrated. Five state universities and systems—which enroll 1 percent of the students in the sector—hold a quarter of all the endowment assets.

What should take priority in making college affordable?

Endowment funds are important to institutions. They allow them to provide financial aid to most enrolled students, to offer opportunities that would otherwise be unavailable, to pay their faculty, and more. But endowments at the vast majority of colleges and universities are not large enough to substantially reduce tuition for most undergraduate students.

The discussion about whether all the income from endowments should be free from taxation is active and controversial. But whatever policies are designed to target the wealthiest colleges and universities are unlikely to touch the vast majority of undergraduate students.

Making college less of a financial strain for students and families will require restoring per student state subsidies at public institutions, increasing need-based financial aid from federal and state governments and from institutions themselves, improving efficiency on college campuses, and developing a stronger, more equal economy

Diverting attention from these difficult issues by focusing on the endowments held by a very small number of colleges and universities is not a real solution.

Research Areas Education
Tags Higher education School funding Paying for college
Policy Centers Center on Education Data and Policy