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College Endowments Bounce Back

University endowments bounced back last year, according to data released this morning. But experts warn that families shouldn’t expect lower tuition or more financial aid just yet.

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The figures, from the National Association of College and University Business Officers and the Commonfund, show total returns for university endowments averaged about 19% during fiscal year 2011, which ended June 30 (prior to last fall’s volatility). That’s up from 12% total returns in 2010 and a 19% loss in 2009. The returns weren’t as large as the Standard & Poor’s 500-stock index, which gained 30.7% during the same time period. (The Commonfund explains just 16% of the endowment money in total is invested in domestic equities.)

Many universities cited shrinking endowments as a reason for tuition hikes and cutbacks in programs during the past few years. School endowments are mostly funded by alumni contributions and other donations and used to pay for a variety of expenses, including financial aid to students, research projects and new academic buildings. But despite regaining a lot of the value they lost during the market downturn, college reps say it’s unlikely that this will result in lower tuition bills soon. “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 nonprofit colleges.

Experts say that more years of growth are needed in order for endowments to strengthen college budgets. For instance, endowments would need 8% to 9% annual returns over a 10-year period to keep pace with spending, inflation and investment costs, says Verne Sedlacek, president and CEO of Commonfund. Ten-year average annual returns are 5.6%, according to the study. Separately, 47% of institutions have lower endowment values than they did in 2008, suggesting that schools are still coming off difficult years.

At public colleges, the latest spike in endowment returns could have even less of an impact on students. Public colleges are significantly funded by state money, which fell by 7.6% for the 2011-12 academic year, the largest decline in nearly half a century. A total of 41 states cut their spending for the current academic year, ranging from as little as under 1% to up to 41%. State appropriations and tuition provide most funding for public colleges, with endowments playing a much smaller role, says Daniel Hurley, director of state relations and policy analysis at the American Association of State Colleges and Universities, which represents public colleges. Also, while earnings on endowments are growing, he says, these funds are typically restricted in how they can be used, based on the donor’s request.

On average, colleges spent 4.6% of their endowment value during the previous academic year. That’s up slightly from 4.5% in 2010 and 4.4% in 2009 but down from the past decade’s peak of 5.1% in 2003. And despite the latest returns, it’s unlikely that colleges will significantly boost spending from the endowment in part because concerns remain about renewed market volatility and the possibility of a new round of losses, says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com.

The upside is that in the near term students are unlikely to see new cutbacks to school aid or campus project cancellations, and instead they’ll probably encounter more of a status quo, says Kantrowitz. During the past few years, colleges stopped construction projects, froze faculty pay, and cut back the number of classes they were offering – in part because of the hit their endowments had incurred. The latest endowment performance lifts the pressure somewhat, he says, but not entirely. That’s especially the case at private universities. NAICU’s Warren says students will see less pressure on tuition to rise and more aid, especially if consecutive years of strong returns follow. (That might prove hard; though official data isn’t available, endowment returns fell about 3.5% between July and December 2011 because of market volatility, says Sedlacek.)

Going forward, if endowment returns continue to grow, colleges could make more aid and grants available to students starting in 2013-14, says Kantrowitz. Tuition spikes could also slow down: when endowments are up, he says, that results in less pressure on school budgets and thereby less of a need to significantly raise tuition.

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