Rich Colleges Are Getting Richer: What That Means for Students

Harvard University

Source: Harvard Public Affairs & Communications / Photo: Stephanie Mitchell

There’s a wealth gap in America, and it’s not just between the 1% and the rest of us. The country’s most elite colleges and universities — a group that includes big names such as Harvard, Yale, and the University of Texas — have financial resources that dwarf those of most other schools, according to a report by Moody’s Investor Services. The top 40 schools in America hold two-thirds of the total cash and investments owned by U.S. colleges and universities.

Like their less-wealthy counterparts, the richest schools get their money from tuition, fees, and in the case of public schools, state funding. But wealthy institutions are far less dependent on those sources of revenue than most schools, getting more money from large charitable gifts, research grants, and investment earnings.

“This group of financially leading universities is differentiated from the rest of the sector by long-term highly diversified investment strategies, exceptionally strong philanthropic support, and healthy cash flows. Combined, these will contribute to ongoing wealth concentration in the higher education sector,” said Moody’s Analyst Pranav Sharma in a statement.

Overall, private colleges get about 75% of their funding from students in the form of tuition and fees. But at the top 20 schools, just 15% of funds come directly from students, according to the Wall Street Journal. Public schools get about 46% of their money from students, but among name-brand public schools like Michigan and University of California system, students provide an average of 30% of the revenue.

College graduates

Source: Thinkstock

Both public and private colleges and universities in the U.S. have become more dependent on tuition revenue in recent years, according to a 2012 report from the Government Accountability Office (GAO). In simple terms, that means that most students are paying more for college. At public colleges and universities, tuition now makes up a greater proportion of revenue than state funding, a 2015 GAO study found.

“These increases have contributed to the decline in college affordability as students and their families are bearing the cost of college as a larger portion of their total family budgets,” the 2015 GAO report noted.

Smaller private colleges that don’t have huge endowments are also looking to squeeze more out of students. But as tuition rises, many of these schools are finding it even more difficult to attract students. Sweet Briar College, an all-women’s school in Virginia, announced in March that it would shut down at the end of the spring semester. Low enrollment and falling tuition revenue were partly to blame for the closure.

Sweet Briar isn’t an anomaly. Other private schools that have low enrollment and small endowments are also struggling, according to a 2014 report in Bloomberg. “I’m not sure a lot of these institutions have the cushion to experiment with how to stay afloat,” Michelle Weise, a senior research fellow at the Clayton Christensen Institute for Disruptive Innovation, told the magazine.

Students at struggling private schools that do stay in business may have to cope with faculty layoffs, program cuts, and higher tuition. Those who attend public schools that are more dependent on state funding often have to cope with overcrowded classrooms and educational cutbacks that can make graduating on time more difficult. Both groups are likely to end up taking on more student loan debt to cover the costs of their education.

Source: Thinkstock

Source: Thinkstock

Wealthy schools, in contrast, have the financial resources to offer generous financial aid to admitted students whatever their income level. Stanford University recently announced that it would not charge tuition to any student from a family that made less than $125,000 a year. At Harvard, students from families that earn less than $65,000 pay nothing, and those with incomes up to $150,000 get steeply discounted tuition. That’s good news for students who can get into top colleges. But the vast majority of students won’t be admitted to these elite institutions.

Some people want there to be more focus on supporting those schools that, while less selective than the top ring of American colleges, still play a vital role in educating students. “[W]hy in the world would anyone make donations to schools that have endowments in the billions when they can make a huge difference at a school that struggles to provide students with such life-changing opportunities?” asked Sharon Herzberger, the president of Whittier College, in a 2008 letter published in the New York Times.

President Obama, for his part, has pledged to make college more affordable, taking steps like increasing Pell Grant awards for the neediest students and expanding tax credits for education. He also wants to make the first two years of community college free for students. Those are important initiatives, but they may not be enough to fundamentally change a higher education system that’s currently divided between the haves and the have-nots.

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