Current Events and Philanthropy / Philanthropy and Education

Can Endowments Save Higher Education?

Editors’ Note: In response to the recently-released annual survey of 805 college and university endowment returns and the Trump administration’s proposed “skinny budget,” Christopher P. Loss analyzes the future of American colleges and universities. He does so by providing historical context to these contemporary anxieties. 

Last month, the National Association of College and University Business Officers (NACUBO) released its annual survey of 805 college and university endowment returns, and for a second straight year the news was not good. According to the asset management firm Commonfund, who partners with NACUBO to administer and analyze the survey, endowment returns landed in the red last year, averaging 1.9 percent endowment value losses, dropping the trailing ten-year return to 5 percent, well below the 7.5 percent threshold schools estimate they need to cover current expenses. The report also noted that institutions increased endowment spending despite these negative returns.

Looking ahead, as the Trump administration settles into office and higher education seeks to shore up its finances and public image in the face of fresh political challenges and nagging concerns about rising costs and volatile funding for research and student aid, what can we deduce from these data?

Scenario One: Higher education’s financial situation could get worse. The Trump administration’s “skinny budget,” released last week, wasn’t just skinny, it was starving, and includes massive cuts to all areas except national security. Not surprisingly, education funding was not spared as the administration recommended slashing basic research support, student aid, high-school-to-college bridge programs, as well as government patronage for the arts and humanities. What’s more, if endowment returns continue to lag, as they have over the last several years even as the economy has grown, then higher education will find itself staring into a future dark with uncertainty.

Scenario Two: Higher education’s financial situation could get better. Let’s assume that endowment performance improves as the overall economy strengthens and that the Trump administration’s proposed $54-billion in nondefense budget cuts don’t materialize after Congress has its say. Combined with the rollback of federal regulations, something that the administration has promised and that many education leaders profess to support, and the education sector might finally shake the lingering effects of the brutal 2008 recession.

As history has shown, the best times for higher education are flush times, and higher education is desperate for a sustained period of steady economic growth and predictable support. Although we ought not count on anything being too predictable or steady in the coming months, one thing is certain: the cost crisis in higher education—now fifty years in the making—is going to continue to dog higher education until policy makers and education leaders fix it. Students have been accumulating more debt (approximately $30,000) and taking longer to graduate (averaging six years) and then struggling to parlay their earned credential into a well-paying job. At a time when a college degree has become more valuable than ever, it’s slipping out of reach for many students, especially poor students who need it most.

Not everyone agrees with this doom and gloom view. The late William Bowen and Michael McPherson recently argued in their book Lesson Plan: An Agenda for Change in Higher Education (Princeton University Press, 2016) that the attention to rising costs and student debt has been misplaced, and that policy makers should instead focus on the real crisis in stagnant wages and lackluster economic growth. But most everyone else, including me, disagrees with that assessment, and has leaned (implicitly and explicitly) on Bowen’s past work on “cost disease” to explain why. Bowen’s Law, as it is sometimes known, dates to the late 1960s and remains as prescient today as it was then. The theory, in Bowen’s own words, “documented the seemingly inexorable tendency for institutional cost per student … to rise faster than costs in general over the long term.” Tuition is a significant part of per student cost (though not the whole part) and since 1980 tuition has increased nearly 1200 percent—approximately 2.5 times the rate of inflation. This is not sustainable nor should it be tolerated in a country where broad access to affordable educational opportunities (if, admittedly, uneven outcomes) has been the engine behind higher education’s remarkable growth and success. With over 1.3 trillion dollars in student loan debt waiting to be serviced, crippling graduates’ labor-market mobility and purchasing power, to categorize the cost crisis as anything but dire is pure folly.

So, can endowment funds save higher education? The quick answer is, categorically, no. While the country’s richest schools get the most attention (and scrutiny), this is an exclusive club of fewer than 75 members that, together with the next fifty schools, accounts for roughly three-quarters of all endowed funds. Simply put: the vast majority of the country’s 4,700 colleges and universities are not in this league. At private and particularly public institutions, which educate 70 percent of the nation’s 20-million college students, there isn’t anywhere near enough endowment income, nor the flexibility to spend that income thanks to complex donor restrictions, to inoculate schools from the whims of the political economy.

The longer answer is somewhat-less-categorically negative but requires additional context on the vital if poorly understood role that endowments (and myriad allied foundations) have played, and continue to play, in helping colleges and universities fulfill their mission of teaching, research, and service. Research-intensive institutions with large endowments rely on annual distributions as a core revenue stream, along with patient care, if they have a hospital, tuition revenue, and research indirects. For instance, Harvard’s $36-billion endowment—the largest in the country—and its 13,000 discrete funds returned a total of $1.7 billion last year, or a third of the school’s total operating revenues. This is an exceptional case far from the rule. By contrast, less well-endowed colleges and universities, which is to say most schools, are tuition-dependent and rely on their endowment returns to literally keep the lights on. According to the NACUBO-Commonfund report the average institution used endowment income to cover a mere 9.7 percent of their operating budgets, .5 percent more than the prior year. A miniscule change, to be sure, but evidence nevertheless of the long-term consequences of budget cuts and rising costs, and of the impossibility of relying on endowment income to solve the cost crisis. In a world where 90 percent of operating budgets, on average, turn on nonendowment revenues, banking on endowment income to save higher education is ill-advised.

Truth be told, the only thing that can save American higher education are strategic investments in aid and research funding, and a renewed moral commitment to education as an indispensable public good. Last year the U.S. Department of Education distributed over $130 billion in student aid, while federal spending for university-based research and development was $69 billion. When combined with the $80 billion in state-level spending, the total budget outlay for the nation’s colleges and universities is only eclipsed (for now) by spending on defense, social security, and healthcare. Like these other policy areas, the entire American system of higher education is heavily dependent upon government—a conglomeration of programs, laws, regulations, and judicial decisions—and public support for students and research must be cultivated for its continued operation. At a time of pronounced antigovernment sentiment in Washington and around the country, and of rising skepticism about the value of a college degree and of basic research despite overwhelming evidence to the contrary, whether support for higher education will even continue is probably the biggest question of them all.

-Christopher P. Loss

Christopher P. Loss is Chancellor Faculty Fellow and Associate Professor of Higher Education and History at Vanderbilt University. He is the author of Between Citizens and the State: The Politics of American Higher Education in the 20th Century (Princeton University Press). His next book, Front and Center: Academic Expertise and Its Challengers in the Post-1945 United States, will be published by University of Pennsylvania Press.


William G. Bowen, Higher Education in the Digital Age (Princeton University Press, 2013).

Budget of the U.S. Government, Fiscal Year 2016, Analytical Perspectives (Washington, DC: Government Printing Office, 2015), table 29-1. See also College Board, “Trends in Student Aid,” table 1, *[]*; *[]*; and *[]*.

Earl F. Cheit, The New Depression in Higher Education: A Study of Financial Conditions at 41 Colleges and Universities (McGraw-Hill, 1971).

Gareth Davies, See Government Grow: Education Politics from Johnson to Reagan (University Press of Kansas, 2007).

Christopher J. Ryan, Jr. (2015). “Trusting U: Examining University Endowment Management.” Journal of College and University Law, 42(1): 163–217.

Elizabeth Tandy Shermer, “Student Debt Cris and Its Deniers,” Public Books (March 15, 2017).


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