Rise in Endowments May Impact Best Colleges Rankings

If a school's endowment shrinks, it may have less money to spend on its students.

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The value of college endowments, which had fallen very sharply during the recession, is now rapidly recovering along with the stock market. This finding comes from the newly released 2011 NACUBO-Commonfund Study of Endowments, produced by the National Association of College and University Business Officers.

It turns out that 2011 was another exceedingly good year for the performance of college endowments. According to the NACUBO study, the endowments of the 823 institutions that were surveyed had an average increase of 19.2 percent in the year ending June 30, 2011. This represents a significant improvement from last year's average gain of 11.9 percent and the 18.7 percent decline reported in endowments for the recession-plagued 2009.

Yet, despite the overall stock market recovery in the last two years, total endowments have yet to return to the levels that existed prior to the recession.

In terms of the methodology used to calculate the U.S. News Best Colleges rankings, the absolute size and annual performance of a college's endowment are not direct factors in the rankings.

But this is not the full story. A decline in a college's endowment can have a negative impact on the school's budget, since institutions use income from their endowment to supplement tuition from students and other funding sources.

Schools in the study spent an average of 4.6 percent of their endowments last year.

Colleges with large endowments were able to supplement their tuition income and can spend more per student on educational services than schools without endowments or with very small ones. So if a school's endowment shrinks, it may have less money to spend on its students.

One of the factors in the Best Colleges methodology is financial resources per student, which has a weight of 10 percent in the overall rankings. This factor measures the average spending per student on instruction, student services, academic support, research, and related educational expenditures.

U.S. News believes that generous per-student spending indicates that the college can offer a wide variety of academic programs and services. Schools with large endowments therefore tend to do better in the rankings' financial resources indicator than schools without any endowment.

Additionally, schools with large endowments tend to be private universities. In contrast, many public universities continue to face tight or decreasing state appropriations due to sizable state budget deficits. As a result, some public universities have implemented significant tuition increases to try to offset these state budget cuts. Budget cuts have led to cuts in academic programs and reduced spending per student at some schools.

Click here to see the list of the universities with the largest college endowments and how much their market value changed between 2010 and 2011.