Endowment Growth Has muted Effects

Harvard announced two weeks ago that its endowment has soared to $11 billion. Now students are asking what--with yearly tuition, room and board hovering just above the price of a small Merceds Benz sedan--benefits they might see from this wind-fall.

Harvard officials have responded: basically none.

But University officials said the reason an extra $2.2 billion in the University's coffers won't have an earth-shattering impact on tuition is complex-and that the endowment figure can be deceiving.

"For too long, Harvard College--the entity entrusted with undergraduate education and living at Harvard University--has been given the short end of the stick," said Lamelle D. Rawlins '99, Undergraduate Concil president.

In interviews last week, students often cited a statistic from an issue of Time Magazine last spring to express their dissatisfaction with Harvard's spedning policies.

"Harvard, with its $9 billion endowment [last year's number], is in an even more advantageous position [than the University of Pennsylvania]," the Time article said. "A 1-percentage-point increase in endowment spending would yield an extra $90 million, enough to cut its base undergraduate tuition nearly in half."

With $11 billion Harvard could cut even more. So why doesn't it? Harvard officials are quick to point out the drawbacks of such a proposal.

"Time's arthimetic is, I fear, flawed," said Dean of the Faculty of Arts and Sciences (FAS) Jeremy R. Knowles.

First, FAS has only 4.6 billion in its endowment ($11 billion is the total for all of Harvard, including its 10 schools and other units). Second, roughly 75 percent of the endowment is restricted for some particular purpose. For the University to simply reallocate his money to lowering tuition would be illegal.

More fundamentally, Harvard has a financial structure different from some universities. The endowment is largely for programmatic purposes--endowed professorships, centers and research projects. These, of course, ultimately benefit students; they just don't lower tuition.

"Particular endowments like professorships in areas that are very important to a relatively small number of students, but can still be supported at Harvard, are very important," said Provost Harvey V. Fineberg '67. "Harvard teaches 50 languages. No one student is going to study all 50 languages, but the fact that you have the opportunity to study one of those or two, I think, is a wonderful asset."

But at Rice University in Houston, Texas, the endowment is used largely to lower tuition. Only about 10 percent of the university's revenue comes from tuition, and endowment covers the rest, according to Dean W. Currie '69, vice president for finance and administration.

Currie said this makes Rice more accessible. "This way we can attract and provide an education for absolutely wonderful students who would otherwise have to go to a state school or take on a great deal of debt," he said, though he added that this is just one way to finance a school.

In comparison, about 25 percent of the FAS's revenue comes from tuition-even after financial aid is subtracted out.

Harvard's room, board and tuition is about $32,000 and Rice's is about $20,000

Harvard officials were quick to point out that the College offers need-blind admissions and financial aid that meets all demonstrated need.

Still, the average price students pay to attend Harvard is higher than at Rice, but Harvard officials said that the product Harvard provides cost more than what students pay-regardless how high the price.

"An analysis a few years ago indicated that even before financial aid is taken into account, the tuition covers only about half the cost of an education here-the rest is covered by annual giving and income from the endowment," said Harry R. Lewis '68, dean of the College.

Moreover, Harvard's endowment is deceptively large In fact, in an important sense Rice-and Princeton, Agnes Scott College, and Academy of the New Church-are wealthier than Harvard.

Harvard is 7th on a list of private institutions ranked by endowment assets per full-time student, according to last year's endowment study by the National Association of College and University Business Officers. This means Harvard-despite having the largest endowment in the U.S.-has less money to spend per student than a number of other institutions.

The other major reason Harvard's faculty and students won't immediately feel the impact of the 25.8 percent return the University earned on the endowment this year is that the payout formula is designed that way.

Harvard uses two principles to determine each year's payout. It aims to keep inflation from eroding the endowment while providing a reliable and, more importantly, steady stream of income for operations.

In fiscal year'96 these principles translated into a 3.65 percent payout, one of the lowest during the past 25 years, although Harvard earned a 26 percent return, its best performance since 1986.

But 'Harvard could-according to a number of financial executives inside and outside the University-pay out more and still maintain the purchasing power of the endowment in perpetuity, if officials wanted to. In fact, most financial executives said that Harvard could pay out as much as 5 percent a year and still protect its funds from inflation.

All that said, Harvard's major goal for its endowment is to preserve the quality and standing of the University into the future.

"The endowment is designed to preserve what Harvard offers to students forever," Lewis said. "We never want to face the day when the fundamentals of a Harvard education-including its accessibility to everyone regardless of their financial circumstances-would have to be compromised.

But at Rice University in Houston, Texas, the endowment is used largely to lower tuition. Only about 10 percent of the university's revenue comes from tuition, and endowment covers the rest, according to Dean W. Currie '69, vice president for finance and administration.

Currie said this makes Rice more accessible. "This way we can attract and provide an education for absolutely wonderful students who would otherwise have to go to a state school or take on a great deal of debt," he said, though he added that this is just one way to finance a school.

In comparison, about 25 percent of the FAS's revenue comes from tuition-even after financial aid is subtracted out.

Harvard's room, board and tuition is about $32,000 and Rice's is about $20,000

Harvard officials were quick to point out that the College offers need-blind admissions and financial aid that meets all demonstrated need.

Still, the average price students pay to attend Harvard is higher than at Rice, but Harvard officials said that the product Harvard provides cost more than what students pay-regardless how high the price.

"An analysis a few years ago indicated that even before financial aid is taken into account, the tuition covers only about half the cost of an education here-the rest is covered by annual giving and income from the endowment," said Harry R. Lewis '68, dean of the College.

Moreover, Harvard's endowment is deceptively large In fact, in an important sense Rice-and Princeton, Agnes Scott College, and Academy of the New Church-are wealthier than Harvard.

Harvard is 7th on a list of private institutions ranked by endowment assets per full-time student, according to last year's endowment study by the National Association of College and University Business Officers. This means Harvard-despite having the largest endowment in the U.S.-has less money to spend per student than a number of other institutions.

The other major reason Harvard's faculty and students won't immediately feel the impact of the 25.8 percent return the University earned on the endowment this year is that the payout formula is designed that way.

Harvard uses two principles to determine each year's payout. It aims to keep inflation from eroding the endowment while providing a reliable and, more importantly, steady stream of income for operations.

In fiscal year'96 these principles translated into a 3.65 percent payout, one of the lowest during the past 25 years, although Harvard earned a 26 percent return, its best performance since 1986.

But 'Harvard could-according to a number of financial executives inside and outside the University-pay out more and still maintain the purchasing power of the endowment in perpetuity, if officials wanted to. In fact, most financial executives said that Harvard could pay out as much as 5 percent a year and still protect its funds from inflation.

All that said, Harvard's major goal for its endowment is to preserve the quality and standing of the University into the future.

"The endowment is designed to preserve what Harvard offers to students forever," Lewis said. "We never want to face the day when the fundamentals of a Harvard education-including its accessibility to everyone regardless of their financial circumstances-would have to be compromised.