The measure of a college's worth often is judged as much for the money it banks in an endowment, as for the graduates it produces in the classroom.
“It tracks pretty well in terms of an estimation of quality,” said Richard Ekman, president of The Council of Independent Colleges, a service organization representing 570 colleges and universities.
Endowments, whether restricted or unrestricted, in general represent donations that colleges and universities receive and invest in hopes of using earnings to fund such things as scholarships, fellowships, faculty hiring, research and building projects, without having to touch the principle. Colleges often cap the amount of investment income that can be spent, thereby ensuring the total endowment will grow.
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Endowments also are used as a guarantee — collateral — by colleges when they go to borrow for things such as new classroom or dormitory construction. The larger the endowment the lower risk to the lending institution, so the college borrows at a lower rate.
On average, educational endowments reported investment returns of 9.7 percent in 2005, according to the Commonfund Benchmarks Study. The annual survey of 729 private college and university endowments, public educational endowments, independent school endowments and private foundations showed that the institutions spent an average of 4.6 percent of the earnings.
Endowments generally do not spend more than 5 percent of its earnings.
“This comes from years of observations,” said Ekman, “so that the value of the purpose of the endowment can continue. It’s important to cover the day-to-day and year-to-year ebbs and flows of expenses. This type of spending gives a cushion and predictability.”
While endowments are growing and more universities are engaging in billion-dollar fund-raising campaigns, the cost of tuition for students continues to increase. The cost of educating a student for a year is only partially offset by tuition, Ekman said. Only the largest endowments, like Harvard’s $25.9 billion at the end of fiscal year 2005, can totally offset the cost of tuition for some students. Harvard, for instance, waives tuition for accepted students with family incomes below $60,000 per year.
Most restricted endowments, however, are able to fund student financial aid, according to Ann Kaplan, director of the Voluntary Support of Education Survey at the Council for Aid to Education. Thirty-six percent of the 1,005 colleges and universities that responded to its most recent survey reported that restricted endowment money is used to support scholarships. At liberal arts colleges, more than half of endowment income is earmarked for student financial aid as a requirement of the donor.
To students carrying a $40,000 college bill, that's little comfort.
“Voluntary support has never been great at redistributing income,” Kaplan said. “That’s never been its purpose. It’s not really the major outcome.”
Some donors, of course, do restrict gifts to help the neediest students.
“Scholarship funds can reflect a social commitment to increase access to education,” said Ekman. “They can provide for diverse students and make education available to students for whom it might otherwise not be.”
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