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.