In Part 1 of this series, “It’s Good to Be the King,” I addressed a recent report from Moody’s Investors Services that predicted a growing separation of a relative handful of super-rich universities from the rest of higher education. I also considered the media coverage generated by the Moody’s report, and expressed my bewilderment that the report’s conclusions did not generate deeper analysis and greater concern.

Perhaps the reason that there was not more media attention and review was because Moody’s summation of the institutional wealth of the richest universities did not surprise many people. There is evidently a broad understanding – and perhaps even acceptance – that some universities have amassed significant wealth, and that the universities with the most recognizable names, and/or the strongest reputations, are often the wealthiest universities.

But what isn’t understood is that it hasn’t always been this way. Most of today’s wealthy universities have long had some financial advantage over other American colleges and universities – but the magnitude of that advantage, and its very recent history, may surprise many people.

Here are a few examples:

• Harvard’s endowment in 1994 was approximately $5 billion. In just 13 years, it grew to more than $35 billion – a 700 percent increase!

• Yale University had an endowment in 1950 of less than $200 million. By 1980, its endowment was still well short of $1 billion. Ten years later in 1990, its endowment was approximately $3 billion – but that figure jumped to $23 billion by 2007, an increase of more than 700 percent in 17 years.

• Duke University, with a current wealth figure of $11.4 billion, had an endowment of just $150 million in 1980. In other words, Duke’s wealth, in only 35 years, increased by 7600 percent!

• The percentage of Harvard’s operating budget paid for by endowment drawdown has increased from 18 percent in 1990 to 35 percent in 2014. Gifts added another nine percent. Only 20 percent of Harvard’s operating budget in 2014 came from tuition, fees, room and board.

• In its financial statement from 2014, Princeton lists income of $2,334,743,000 ($1,892,079,000 of which came from investment earnings, or 81 percent of all income), versus expenses of $1,233,982,000. The difference between Princeton’s income and expense (called “profit” in the world of commerce) was $1,100,761,000 – a margin of 47 percent. That’s not a bad rate of return for a nonprofit institution!

So the point is that most university endowments have grown at a rate far faster than the rate of inflation, or virtually any other metric that we might use for comparison. Universities that were somewhat ahead of the pack 20 or 30 years ago now find themselves with a commanding lead – and a lead that, at least among the wealthy private institutions, is only likely to grow wider in the coming years (as Moody’s notes).

In higher education, the front-runners include more than the 20 institutions listed by Moody’s. But even if we expand the list to the wealthiest 100 private colleges and universities, which, because of generous alumni, aggressive investment strategies, and a general desire to stay relatively small and very selective, have a growing reputation and a per-student financial advantage over the other private institutions and over virtually all of the public institutions. (The publics have been handicapped by significant reductions in state appropriations over the past 35 years or so, and by their large, and growing, size, which has the effect of diluting the number of dollars of endowment per student.)

The problem is that the 100 wealthiest institutions have a total enrollment capacity sufficient to accommodate less than three percent of the students who enter higher education each year. Collectively, they have fewer than 100,000 seats for freshmen, but over three million students begin college each year in this country. Moreover, in order to attract more students with the capacity to pay the list price, these wealthy institutions are increasingly turning to wealthy international students, leaving even fewer seats for American students. (Nearly one of every eight freshmen at Harvard, the University of Pennsylvania and Columbia, for example, is an international student – a 50 percent increase over the past 15 years.)

And the wealthier and more famous these colleges and universities become, the more desirable they are to those prospective students (and their parents) who desire the most prestigious education possible and a name on their diplomas that will be instantly recognizable, fame and status being useful proxies for quality.

As a consequence, it is now common for many of these rich and famous institutions to accept less than 10 percent (sometimes, less than five percent) of their applicants, the large majority of whom have outstanding high school records.

With such strong student demand, and with endowments that are growing much faster than the historic rate of growth of actual educational costs, these wealthy institutions are far more focused on keeping up with their peers (in terms of both price and the addition of campus amenities) than they are with keeping their costs under control, or their tuition affordable. Thus, we see such otherwise incongruous facts as, for example, Stanford’s choosing to increase tuition by 14 percent since 2010, even as its endowment climbed from $13.85 billion to $21.4 billion over the same five years.

In its most recent annual financial report, Stanford notes that the increase in the financial aid provided by the university in 2014 was smaller in percentage terms than the increase in tuition, making Stanford more expensive for the average student than in 2013. The report noted:

“[The increase in financial aid was] slightly less than the increase in tuition rates, and consistent with less need for aid, based on current economic conditions.”

So the economy is a bit stronger, and therefore students will pay more. Never mind that the university’s endowment increased by more than 50 percent in the last five years.

And Stanford is not alone. All of the other richest 10 private universities increased their tuition price last year, and none of them has ever reduced its tuition, even in years when it experienced a 20 percent return on its investments.

There is no immediate prospect that any of this will change. Each of these institutions pays close attention to the tuition and endowment of its peers and competitors, and each is determined to keep pace, in the belief that charging a lower price will be interpreted as delivering a lesser product. Even as the sticker prices for students exceed $60,000, about half of the students at these enormously wealthy universities do not qualify for institutional financial assistance – meaning that they (and their families) apparently have the capacity to pay $250,000 for their four-year degree. Since increasing numbers of students at the super-wealthy institutions are the sons and daughters of affluent overseas families, demand for a brand-name diploma (and the opportunity to mingle with wealthy students from all over the world) will, in all likelihood, continue to grow.

Why is any of this a bad thing? Well, it’s certainly not a bad thing for the institutions that are prospering in this environment. However, it places less affluent institutions under enormous stress, and it restricts social mobility. We will examine both of these issues in subsequent posts to this series.

Next week, Part 3: It’s Not a Good Thing to Be Other Than a King.

On April 16 of this year, Moody’s Investors Services published a report entitled “Wealth Concentration Will Widen for U.S. Universities.” This report was the subject of articles on the same day in such major media outlets as the Boston Globe, The Wall Street Journal and BloombergBusiness.

The underlying tone of the Moody’s report was fundamentally positive, as was true of the media reports referenced above. Given Moody’s previous grim reports regarding the perceived financial weakness of much of American higher education (see an earlier blog post in this series, Moody’s Blues, Feb. 14, 2013) a positive report on a few enormously wealthy AAA-rated institutions was presumably welcomed by many readers and investors.

But while Moody’s job is to rate the financial strength of individual colleges and universities, I might have expected the media to see the worrisome side of the story – which is, as the Moody’s announcement says, “U.S. universities with the greatest wealth… are positioned to expand their financial advantage relative to the remainder of the sector.” What does Moody’s prediction mean in the long term for higher education? If the rich institutions are getting richer, does it necessarily follow that the poor institutions are getting poorer? So is this report from Moody’s good news or bad news for the American public and the American economy?

It’s Good to Be the King

Mel Brooks’ famous line can also be applied to the royalty of American higher education: the 100 or so colleges and universities with endowments in excess of $1 billion. However, there are class distinctions even within royalty: crown princes outrank earls; viscounts take precedence over barons – and a $36 billion endowment has far greater impact on the financial health of a college or university than does a $1 billion endowment.

Or so The Boston Globe (“Wealth Inequality Grows Among US Universities, Study Finds,” April 16, 2015) would suggest. In a table accompanying the article, the Globe lists 10 private and 10 public universities in descending order, based on the size of their wealth (endowments plus cash). At $42.8 billion, Harvard tops the list of private universities, and at $36.7 billion, the University of Texas tops the public institutions.

But total wealth is a misleading criterion to use in ranking universities. Colleges and universities typically transfer approximately five percent of the value of their endowments into their operating budgets every year. To gauge the effect of these budget transfers, a more meaningful criterion for ranking would be to divide the value of the endowment by the institution’s enrollment, in order to determine endowment dollars per student.

Using that criterion, the University of Texas, a higher education system with nine campuses and a total of 206,896 students, has approximately $175,000 endowment dollars per student, whereas Harvard University, with an enrollment of just 14,600 students, has almost $3 million endowment dollars per student.

A five percent drawdown allows Texas annually to transfer roughly $8,750 from its endowment to its operating budget on a per-student basis (.05 x $175,000), whereas Harvard is able to transfer approximately $150,000 per student (.05 x $3,000,000) from its endowment to its operating budget every year.

The total endowments of these two institutions are somewhat comparable in absolute size, but the impact of Harvard’s endowment is far greater than the impact of Texas’s endowment on the lives of their respective student bodies. “It’s good to be the king” – especially when it comes to endowment dollars per student. Harvard is the king, and Texas is somewhere between a squire and a gentleman.

The 10 richest private universities have wealth totaling $189 billion, for a collective student enrollment of 155,789 – a per-student wealth of $1.2 million, and a per-student endowment drawdown of approximately $60,000 annually. The 10 richest public universities have wealth totaling $121.7 billion, but have a collective student enrollment of 1,666,185 – a per-student wealth of just $73,000, and a per-student drawdown of only $3,650 annually.

In other words, the 10 richest private universities have 16 times more endowment dollars in annual per-student support than do the 10 richest public universities. To rank the richest privates and the richest publics side-by-side by total endowment, with the clear implication that great (and largely comparable) wealth exists in both, as the Globe did in its article, is to convey a very misleading impression to its readers.

But haven’t the rich private universities always been rich? And aren’t the large publics richer than they ever have been? Why is this even a story?

I invite you to check back next week, when we consider Part 2: The Growth of Institutional Wealth.