Numerous news reports and intensified congressional scrutiny in recent months have focused attention on two particular issues in higher education: rising university endowments and annual tuition hikes.

Is there a connection? It depends on the university. Experts say that only a handful of institutions (not including USC) can effectively dip in to endowment to offset tuition costs. That said, what exactly is an endowment, and how is tuition determined?

Endowments

University endowments consist of gifts given over time to the institution for specific reasons, such as research, new buildings, professorships or student aid. In general, most of the endowment is restricted to the purposes of these gifts.

At USC, the university’s $3.7 billion endowment is a pooled fund comprising a variety of gifts, trusts, endowments and other donated funds. The mission of this endowment fund is to provide a stable foundation for long-term excellence in educational and research activities.

“Growing an endowment for current needs as well as future needs is a challenge that every college or university faces. All of us build for the long term while focusing on what our institutions require today,” said USC President Steven B. Sample. “This endowment-building model has served the educational, cultural and technological interests of the United States extraordinarily well since World War II, allowing the nation to remain the center of innovation amidst unprecedented global competition.”

When USC President Norman Topping and the university’s trustees began 50 years ago to set USC on a course toward becoming a top national research university, the USC endowment was a mere $3 million.

That figure grew to $470 million by 1991, when President Sample came to USC. Under Sample’s guidance, and with an energetic fund-raising approach and prudent, diversified investment strategies, the endowment has risen to $3.7 billion.

How are endowment funds spent? USC and other universities have adopted policies on the use of endowment interest that aim for consistent equity across generations. Universities last for centuries, and caps on spending of interest ensure that, over the decades, generations of students and faculty continue to enjoy the same or an even better level of support from the endowment.

Over the past 20 years, as the overall endowment has grown from interest and new gifts, about 5 percent of endowment returns have been spent annually on fulfilling the university’s mission. That compares fairly closely with the historic spending rates of peer institutions across the nation. In fact, USC’s annual endowment spending over the last two decades has never been below 4.79 percent and has never been higher than 6 percent.

At USC, nearly half of the expenses funded by endowment income relate to student aid and scholarships, meeting the university’s commitment to enabling access to all qualified students from all backgrounds. Much of that student aid is targeted to undergraduate students.

The remainder of endowment income spending is related to support for a world-class faculty, library expenditures and the like. Again, these funds directly serve the teaching and research missions of the university.

When it comes to the size of endowment, USC is in a unique situation compared with other top universities.

Although USC ranks No. 22 nationally in terms of total endowment funds, there is a big difference when that endowment is compared with institutions such as Stanford ($17 billion), Harvard ($34 billion), Yale ($22 billion) and Princeton ($15 billion). That’s not only because of the difference in endowment size but also because those institutions have far fewer students.

While USC leaders consider its size an advantage that allows the university to provide an expansive breadth of programs with a commensurate depth of curricula, in this case the size of the student body constrains the university’s flexibility to change expenditures or dip in to endowment funds in an unusual way.

Since late 2007, a handful of private, well-endowed universities and colleges publicly have made pledges to waive tuition costs for students coming from middle-income families. These institutions include Harvard, Yale and, most recently, Stanford.

In making their announcements, Stanford and Yale indicated they would pay for the enhanced aid program in part by increasing their endowment payout.

According to a recent Los Angeles Times article, Harvard has an endowment per student of $1.7 million. Yale’s endowment per student is $2 million. Princeton’s is $2.2 million. USC’s endowment per student is $118,000. The Times article, in part, read:

“Only about two dozen schools in the nation can afford to join the race to so dramatically boost financial aid,” according to Terry W. Hartle, a senior vice president with the American Council on Education. “Most private colleges and universities simply don’t have those resources,” he said.

A Business Week article reviewing the situation in February 2008 noted:

“While the tuition aid by the big schools is welcomed by students and their families, comparable largesse is not a feasible option for most of the nation’s schools, which have endowments significantly below Harvard’s…. Most higher-education institutions, including small private colleges and state universities, simply can’t compete with the vast financial resources of the Ivies and their peers. The majority don’t have endowments anywhere near the size they would need to offset the cost of tuition for middle- and upper-middle-class students, experts say.”

Tuition and Financial Aid

At USC, the approach to tuition and to financial aid is always a subject of serious consideration by senior administrators and the Board of Trustees. In part, that is because undergraduate tuition and fees account for only about 80 percent of the actual total cost of instruction USC must pay. Despite that gap, over the years USC has increased its commitment to access to all classes of students.

In fact, at USC, financial aid is growing faster than tuition: over the last 10 years, tuition has risen about 65 percent – while financial aid grew about 80 percent.

In fall 1997, USC was providing approximately $100.3 million in aid to 9,462 students. In fall 2006, the university provided almost $181 million to 9,715 students. This represents an average-grant-per-student increase of more than 75 percent in the past 10 years and an 80 percent increase in total aid provided from university funds.

Overall, about 60 percent of the undergraduate population at USC receives financial aid – with an average grant amount of $18,600.

USC administrators firmly believe this approach has paid off: USC currently enrolls more under-represented minority students than any other private research university in the country (3,053 in 2006).

Moreover, USC enrolls 17.7 percent low-income students (defined as those students whose family income makes them eligible to receive Pell Grants).

For purposes of comparison, according to the Journal of Blacks in Higher Education (autumn 2007), Stanford enrolls 12.6 percent of Pell eligible students; Harvard enrolls 11.9 percent; Duke enrolls 9.6 percent; and the University of Pennsylvania enrolls 8.8 percent. Most importantly, low-income students at USC graduate at rates comparable to the overall undergraduate population.

That is not to say that the university doesn’t want to help middle- and upper-income families achieve the college dream. USC has several financial aid programs, which include loan options, available to help these families bridge the college years.

“The USC Board of Trustees will continue to seek ways to enhance financial aid to all and will continue to seek to build the basic endowment,” Sample said. “We’ve made many strides in recent years, and we will continue to raise funds to support our academic mission.”

To read USC's letter to the Senate Finance committee, click here.