with college endowments enjoying healthy returns, parents are hoping to finally catch a break when it comes to tuition costs. they shouldn't hold their breath.
new figures show university endowments averaged total returns of more than 19% for the fiscal year ended last june, the second consecutive year of gains, according to the national association of college and university business officers and commonfund, a nonprofit asset manager.
yet schools say they can't cut tuition until their endowments have had more years of strong growth. even after the recent run, nearly half of universities and colleges have smaller endowments than they did in 2008. "dramatic changes won't come instantly," says david warren, president of the national association of independent colleges and universities, which represents more than 1,000 u.s. private colleges.
the average annual cost of tuition and fees at a four-year private university this year is $28,500—a 15% increase from five years ago, according to the college board. the cost at a four-year public college for in-state residents has risen 28% to $8,244. "endowments are doing better, but college costs are still rising," says mark kantrowitz, publisher of finaid.org, which tracks financial-aid issues.
indeed, over the long term, endowments would need to average annual returns of 8%-9% to keep pace with inflation, spending and investment costs, says verne sedlacek, president and ceo of commonfund. ten-year average annual returns through june 2011 were less than 6%.
most endowment money is earmarked for a specific purpose, such as financial aid or an endowed faculty chair, but experts say when that revenue increases it places less pressure on other college costs. indeed, some parents are seeing relief on out-of-pocket costs thanks to newly pumped-up endowments.
the university of oregon, whose endowment increased by 14% last fiscal year, is rolling out a new grant program for the coming school year, says jim brooks, director of financial aid and scholarships. the grants, which will be funded by a large donation to the university's endowment, will cover about $5,000 in college expenses per year for in-state students from households earning roughly $50,000 to $140,000 a year.
other schools are making smaller concessions. last month, the university of illinois, whose endowment rose 24%, approved a roughly 2% annualized increase of its tuition over the next four years—the smallest in the past decade, says spokesman thomas hardy.
princeton university, which has the fourth-largest endowment in the country at $17.1 billion, said last month it will increase tuition by 4.5%, an increase from last year's 1% bump. but to offset those higher costs, the university said it also will raise the nonloan financial aid it makes available to students by nearly 6%.
since the recession, many endowments have trimmed their allocations to domestic stocks and have increased exposure to alternative strategies, like private equity, hedge funds and real estate. just 16% of total endowment funds were invested in u.s. equities last fiscal year, down from 28% in 2005, according to commonfund.
it remains to be seen whether this strategy will continue to boost returns. though official data isn't available, mr. sedlacek estimates that endowments lost 3.5% for the second half of 2011, roughly in line with the broad market.