Name: How Colleges Make Money: Endowments, Tuition and State Funding
Uploaded: 2024-04-29T04:01:00Z
Duration: 8 min 22 s
Description: Some donors threatened to pull support from universities last year over mounting pro-Palestinian protests. But private gifts are just one way schools are funded. Former Northwestern President Morton Schapiro breaks down the complex financials of higher education. Photo illustration: WSJ

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Some donors threatened to pull support from universities last year over mounting pro-Palestinian protests. But private gifts are just one way schools are funded. Former Northwestern President Morton Schapiro breaks down the complex financials of higher education. Photo illustration: WSJ

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How Colleges Make Money: Endowments, Tuition and State Funding

The Columbia University alumnus Robert Kraft says he's not comfortable supporting the school.

Are you still supporting Harvard financially?

No.

Narrator: These are just some of the many wealthy donors who have threatened to pull support from universities over mounting pro-Palestinian protests in the last several months. But those large donations aren't the only thing keeping schools running.

This idea that university trustees and university administrators are gonna say, "Oh my God, I'm gonna change my strategic vision 'cause I'm worried about a $25 million gift," when you have $50 billion in the bank, it's ludicrous.

Narrator: To explain how colleges stay afloat, we asked former university president Morton Schapiro to break down the finances of three schools with different revenue sources and what changes mean for the future of higher ed.

Having a large endowment really helps, and I've been really fortunate to be president of two institutions with very large endowments.

Narrator: Endowments are big funds typically collected through donations and invested.

You only take enough of it so that you can support what the donor wants, but you leave it to be invested and vested. So, the endowment is an investment in the future.

Narrator: In 2023, Northwestern took about 674 million from its endowment, or about 5%, which is the standard amount schools take from their endowments every year.

There's nothing magical about the 5%. You know, if you go much above that, you're probably gonna erode the real value of the endowment. If you go much below it, then it's unfair to the current generation of faculty, students and staff. When things are really bad, I think you should take a higher percentage.

Narrator: That standard 5% of Northwestern's endowment made up more than a fifth of the school's operating revenue in 2023.

When you have the kind of wealth that Northwestern and its peers have, that gives you a lot of flexibility.

Narrator: Schools with large endowments depend less on other slices of the revenue pie like tuition or private gifts.

You can support study abroad activities and you can support all kinds of internships. Endowment per student speaks powerfully to what the life experience is gonna be once you're on campus.

Narrator: It also speaks to the range of students who are likely to be on that campus.

The socioeconomic diversity of the undergrads at Northwestern and like many peer institutions, much greater than it was even while I was president. I started in 2009.

Narrator: In 2020, only about 16% of students at private nonprofit universities paid full price. That's down from 29% in 1996. That's partly due to those ballooning endowment funds. Northwestern's has grown more than six times since 2001.

The endowment grows because of equity markets, you know, stocks and also private equity investments, and the returns have been spectacular.

Narrator: But a lot of that wealth is concentrated in just a few schools in the US.

If you don't have a large endowment, you're gonna be much more conscious about attracting students, in many cases, undergrads who can pay the sticker price. Private colleges, they are not getting state support. So, where are they getting their money? The rest is mainly tuition.

Narrator: Like at Hamilton College in upstate New York where tuition made up almost 60% of operating revenues in 2023. Despite Hamilton's large $1.3 billion endowment, that high percentage-

Makes it a little bit more vulnerable to changes in the market. You better make sure you're gonna continue to be able to get the students and, you know, fill the dorms and get a substantial proportion of them paying at least close to the sticker price.

Narrator: Hamilton said in a statement that the school "admits students without regard to financial need" and that the school is fortunate "to support need blind admission." But there are plenty of schools even more dependent on tuition than Hamilton.

Small schools that really are almost completely relying on net tuition revenues from undergrads are increasingly in need aware. You know, they're not gonna admit a lot of students from needy families because they're not gonna give enough need-based aid to make it possible for them to come so they don't admit 'em, 'cause if you admit 'em, their yield is low and your admit rate is very high and you don't look as selective.

Narrator: And there's also a looming threat.

They look at the demographic cliff that's about to hit, and the number of high school graduates is gonna go down substantially, we expect, over the next couple of decades.

Narrator: This enrollment cliff is in part because of a decline in birth rate since the Great Recession.

The vast majority of undergrads in this country go to a campus within 50 miles of where they graduate high school. There's no cliff in a lot of the Sunbelt, but there's a really precipitous cliff in other places, Rust Belt, New England, et cetera. You know, Hamilton, again, has a international draw that's gonna protect it, but there are a lot of other liberal arts colleges who draw much more locally, and it's gonna be a real struggle for them once this cliff is realized. When you talk about being tuition dependent, it's always said in a negative way. Is there anything positive? I think you're focused more on your undergraduate experience.

Narrator: Smaller private schools aren't the only ones increasingly dependent on their students to pay the bills.

State operating subsidies or state appropriations, the publics, has really plummeted as a share of their operating budgets, so that's really been devastating.

Narrator: The University of California system, which consists of 10 schools throughout the state, got more than 4 billion of state funding in 2023. In 2001, state funding made up nearly 20% of revenues in the University of California system. By 2023, it was less than 10%.

They still get some chunk of change from the state, but boy have they taken a hit. Now, it's been pretty flat in the last 12 years or so, 14 years, but they haven't made up for this precipitous decline. Why? Because states have had a lot of financial troubles. It's not that the state of California is not really proud to have the greatest higher education system in the history of the world. They just can't afford to fund it the way they used to.

Narrator: But schools need to make up for that loss in funding.

A lot of publics have tried to go into what the privates have long done, generate money from your undergrads.

Narrator: Since 2001, average undergraduate tuition for its in-state students has increased more than four times at the University of California, and it is more than tripled for out-of-state students.

It also means that a lot of these public universities need to fill their seats in the classrooms and beds in the dorms with people from outta state where they can charge full price.

Narrator: The estimated average total cost to attend the University of California is about 38,000 in 2024 if you're a resident of the state. If not, the cost nearly doubles to around 72,000. But as seats become more competitive, California approved a plan to cap the number of out-of-state students UC schools can admit and compensate them for the lost income. Now, tuition and fees make up about 11% of the UC system's revenue compared to around 6% in 2001. In a statement, the University of California said that its "world-class college degree is also one of the nation's most affordable," adding that the system "has kept attendance costs relatively low and stable, and added more than 26,000 additional California undergraduates since fall 2015."

They say privatize the publics. But you know what that means? It means raising undergraduate tuition levels without accompanying levels of financial aid so that it makes publics increasingly bastions of privilege.

Narrator: It's an inflection point for many schools across the country.

I think the widening gap in wealth at public and private colleges, university means that, you know, if you're able to get into one of those schools with tremendous resources, the sky's the limit for how it's been.