Article & Journal Resources

Higher education is about to change as elite universities decide what to do with their huge endowments.

BY FAY VINCENT
Thursday, December 13, 2007 12:01 a.m. EST

On Monday Harvard said that next year it will substantially increase its financial aid to middle-class students, bringing its actual tuition costs down to or even below that of some state universities. This is possible because of Harvard's--and other universities'--growing financial success, and it is a signal of far-reaching changes that will ripple throughout higher education.

Superb investment returns have been generated by managers of the endowments of some of the elite private universities, including Harvard, Yale, and even of small liberal arts colleges like Amherst and Williams. The endowments of these four institutions range from $1.7 billion at Amherst to $35 billion at Harvard, and the investment managers are getting annual returns well in excess of 20%. This is more than the alumni of any of those institutions could possibly contribute, and by an enormous margin.

In 1970, when I became a trustee of Williams, the endowment stood at about $35 million. Even using constant dollars, the growth in the endowment since then has been astonishing. At June 30, 2007 it had reached approximately $1.9 billion.

Much (but not all) of this growth is due to the major diversification in the investment mixture adopted by trustees of these schools, who realized some 30 years ago that sticking with the ancient formulae of stocks and bonds was no longer prudent. The change came about because the Sage of Omaha, Warren Buffett, persuaded Grinnell College in 1976 to invest some $13 million in a local TV station that he had identified as a golden opportunity.

Before then, boards at such places worried that nontraditional investments might raise legal issues, or subject them to criticism from alumni. But when the Buffett suggestion turned into a significant windfall of some $36 million for Grinnell in about five years, the rest of the endowment world got the point. I once asked Warren if he had planned to cause such a major switch in strategy. He assured me he had not. "I just saw it as a good buy," he said.

Now, however, these enormous endowments are beginning to raise some fascinating issues for all of higher education. The most obvious issue is whether these schools can seriously claim to have any further need for donations from alumni and friends.

And if, as seems likely, there is much less need for additional giving, does that not mean the administrations of these institutions can operate without the traditional checks and balances of informed alumni? The boards and administrations of the well-endowed schools can safely and proudly proclaim their independence.

In the past, it would have been impossible to ignore alumni. Perhaps an early indication of what I am raising is the recent tussle at Dartmouth over the number of trustees the alumni will be permitted to elect. There the administration has instituted a by-law change that will result in an increase in the number of trustees to be elected by the board, thereby decreasing the power of the alumni.

In the present circumstances, the administration and boards of these schools now control the money because the endowment is managed by internally controlled entities. Accordingly, the most important voice at Yale would have to be the estimable and much-respected David Swenson, who has managed the Yale endowment to astonishing annual returns of over 20% for 10 years. Yale's endowment is about $22.5 billion. What does this mean for the future of governance at Yale? I wonder.

Similarly, these powerful investment returns will change tuition pricing and financial aid--and not just at Harvard. A scholar who follows these matters closely recently told me that he anticipates that the elite private colleges and universities will, in the not-too-distant future, stop charging tuition to any student whose annual family income is below the top 5% of all American families--currently around $200,000.

We already have seen a competition among these schools as of late, with "Free to $30,000" replaced by "Free to $40,000" and now "Free to $60,000." In fact, a recent announcement at Phillips Exeter Academy, that they are offering a free boarding school education to admitted students whose families earn $75,000 or less, raised the stakes for higher education.

If a "Free to $200,000" policy were to be enacted at my alma mater, Williams College, it would cost them only something like $15 million in net tuition revenue out of an operating budget of $200 million. At Harvard, the percentage contribution would be even less. Given the endowment performance at places like Williams and Harvard, they could easily adjust to the loss in tuition revenue. But what about all the lesser-endowed schools that are much more heavily dependant on tuition to maintain their financial stability? How can Fairfield University--where I have served as a trustee--possibly forego tuition to that extent?

What this means is that the cost of the educational Mercedes will be less than the educational Ford. And when Harvard is cheaper than Fairfield, how can Fairfield increase tuition each year, when it will no longer have the umbrella of similar tuition increases being announced by places like Williams and Yale?

I suspect many of us have viewed a four-year college education as a commodity that is priced within a reasonably narrow range. In the past, the Fairfield cost was close to that at Williams. If, as is likely, the big guys drop tuition for all but the richest students, all this will change.

There is another aspect of the financial aid universe that will be affected by these changes in pricing. Currently, there are universities and colleges granting what are known as "merit scholarships." These are financial grants to students who have no demonstrated need.

The Ivies, and many well-endowed institutions, profess only to grant aid based on need. But in the present circumstances, merit grants are being used to tempt talented students away from the Ivies. Some students accept these grants, and decline admission offers at the very elite schools in order to save money for graduate school costs. Thus, Harvard and Williams may be losing attractive students for largely financial reasons. In those cases, the merit offers make money a solid reason to go to a school down the food chain.

If, as is likely, the big guys drop tuition, all this will change, too. And who can blame the elites for using what they have the most of--money and huge endowments.

Because there are so few of these super-rich schools, the effects of their changes in policies will be felt slowly. But like the change in investment strategy Warren Buffett innocently suggested some 30 years ago, the size and growth of their endowments will have significant and not easily anticipated consequences. The ripples of moves made in Cambridge and New Haven will be widely felt.

Mr. Vincent, a former commissioner of Major League Baseball, is the author of "The Only Game in Town: Baseball Stars of the 1930s and 1940s Talk About the Game They Loved" (Simon & Schuster, 2006), the first in a multivolume oral-history project.