Fiscal year 2011 will go down as the year colleges and universities enjoyed the best returns on their endowments of this young century. Last year, the average college endowment increased by 19.2 percent, up from the 11.9 percent increase of 2010. These increases followed on two very tough years as endowments fell by 3.0 and 18.7 percent in 2008 and 2009, respectively. Those drops have been largely attributed to the financial collapse that began in September 2008 and impacted all industries for much of the following year.

Endowment Importance

Endowments are important for all private colleges and universities as well as most state-supported institutions. These funds, largely brought in by donations and invested heavily, allow schools to attract and retain top faculty, to pay for programs, cover the upkeep and expansion of campus facilities, and help fund student education. Ivy League schools such as Harvard University are usually the best-funded institutions, with the Massachusetts school claiming a $32 billion endowment at the end of its last fiscal year.

An annual survey of endowment returns by the National Association of College and University Business Officers and the Commonfund Institute shows that endowments have risen, although many schools report that overall funding remains below pre-recession highs. According to the survey, The average annual 3-year return for participating institutions was 3.1 percent, reflecting an increase from the FY2010 three-year return of -4.2 percent. The corresponding 5-year return figure was 4.7 percent, up from 3.0 percent in FY2010, while the average annual return over 10 years rose to 5.6 percent from 3.4 percent a year ago.

Positive Returns

Survey respondents reported positive returns across all asset categories including private equity real estate representing non-campus properties. That category was the only one to register a decline in 2010.

Leading the way in 2010 and again in 2011 was domestic equities which saw an increase of 30.1 percent compared with 15.6 percent in 2010. International equities yielded a gain of 27.2 percent; alternative strategies came in at 14.1 percent and fixed in comes at 6.5 percent. Not surprisingly, short-term securities and cash yielded a gain of just 0.5 percent, reflecting the historically low yields paid on these investments.

“Fiscal 2011 was marked by favorable financial markets that benefited higher education endowments. With average returns close to 20 percent and all six size cohorts reporting strong returns, the fiscal year was highly positive for educational endowments participating in the Study,” NACUBO President and Chief Executive Officer John D. Walda and Commonfund Institute Executive Director John S. Griswold said in a joint statement. They added, “However, we should note that fiscal 2011 closed before equity markets encountered headwinds and high volatility beginning in July 2011 caused by concerns about the debt crisis in Europe, the stubbornly high U.S. unemployment rate, and much slower growth in the U.S. economy. Endowments very certainly were stressed by these factors during the latter part of calendar year 2011.”

Looking Ahead

As positive as the news is for 2011, there are some problems on the horizon. Specifically, Walda and Griswold noted that the longer-term gains still fall short of what schools need to pay for annual spending, inflation and investment managing. Reporting schools spent an average of 4.6 percent per year last year and with inflation running at approximately 3 to 4 percent, annual gains of 8 to 9 percent are needed to stay even. Thus the 10-year average gains of 5.6 percent are not keeping pace with what schools will need going forward.

Equity Time

Break open the piggy bank 'cuz you're going to need every cent to help pay for college.

Certainly, the listed costs equated with these schools are their “sticker price” which means that grants and student aid can lower final costs considerably. Still, for medium wealth families aid is not a guarantee which means that some students and their families may have to foot everything. Time to tap the equity in your junior manse!

There are two things which seem to be contributing to this trend:

Firstly, college costs continue to rise at twice the rate of inflation. No one knows for certain why education is rising at such a rapid rate or what can be done to slow the process. Some argue that hiring and retaining faculty costs more money while others point to new programs, buildings, even sporting venues as contributing to the sharp rise.

Secondly, last year just five colleges broke the $50K barrier. This means that that the trend toward higher education costs is continuing unabated despite a sour economy and with high unemployment weighing in. Many of the pricey schools have large endowments, most of whom also lost millions if not billions of dollars when the stock market sank last fall.

Surging Costs

As recently as six years ago, just six colleges had topped the $40K mark but now 224 have reached that threshold. Some see the rapid rise as a portent that prices will eventually peak while others are dismissing concerns and saying that a ceiling isn’t anywhere withing reach.

The most expensive of them all? Why that would be tiny Sarah Lawrence College who charges a princely $55,788 for her students followed by Landmark College ($53,900), Georgetown University ($52,161), New York University ($51,993), and George Washington University ($51,775).

Visit the Chronicle for Higher Education website to read – The $50K Club: 58 Private Colleges Pass a Pricing Milestone – and whether some schools are reaching a tipping point. And what would that be? The tipping point is when families decide to look elsewhere for their schooling, sending all important enrollment numbers spiraling downward.

Adv. — Is your family experiencing a financial shortfall this academic year? Scholarships, grants, 529 money, and part time work may not be enough. Learn about private student loans by visiting SayStudent.com, your portal for college financial assistance. We have free tools for your download and updated information about current college financing requirements.