Soaring University Endowments Widen Education Gap

Soaring endowments at a handful of extremely wealthy universities have made America's already stratified system of higher education even more so, and the gap is creating tensions as the less wealthy schools — even state universities — try to compete, the New York Times reports.

In the early 1990s, endowment income represented a small part of revenues at most colleges and universities. In recent years, however, universities have hired sophisticated money managers, who have moved their portfolios into hedge funds, private equities, and other high-performing vehicles — and endowments have skyrocketed. Last year, Harvard University's endowment grew $5.7 billion — an amount that is larger than the endowments of all but fourteen other universities. Today, Harvard and Yale have endowments of $34.9 billion and $22.5 billion, respectively, while fewer than 400 U.S. colleges and universities had even $100 million in endowments during the fiscal year that ended in June; most had less than $10 million.

The wealthiest colleges can tap their endowments to give substantial financial aid to families earning $180,000 or more — as Harvard recently made the decision to do. They can also lure star professors, start new research laboratories, and expand their campuses. Until recently, top public research universities could count on enough in public subsidies combined with tuition and fundraising to hold their own. But with state budget cuts looming, schools like the University of California, Berkeley — which has a $3 billion endowment — are struggling to retain faculty and are scrambling to explain why their financial aid cannot match that of some Ivy League schools.

Last year, Berkeley was awarded $113 million from the William and Flora Hewlett Foundation to create an endowed fund to subsidize professors' salaries and to help recruit top graduate students. But while colleges race to build their endowments, high tuitions have caused a backlash from parents, graduates, and members of Congress, who criticize them for sitting on wealth.

Some educators believe universities may be too timid in their spending. Lawrence Summers, former president of Harvard, said that when investment returns were high, spending should follow suit. "There is a temptation to go for what is comfortable," he said. "This would be a mistake. The universities have matchless resources that demand they seize the moment."

Karen W. Arenson. "Endowments Widen a Higher Education Gap." New York Times 02/04/2008.