College Costs and University Endowment Model

Today’s cost of tuition at a public institution of higher education is (on average) $10K a year and is increasing at twice the normal inflation rate. Sending two children to college is quarter of a million dollars expense in today’s costs. Interestingly, rich state and private University endowment funds help subsidize tuition costs.

Planning for a child’s college expenses is very much a part of your personal finance plan, given the already high and still increasing college costs. Our blog “College Savings Plan” explains how a 529 and ESA Coverdell can help you save for college. The chart shows the 30-year history of the average annual private and public college tuition fees for an undergraduate program. The annual tuition fees for a public university is about $10K a year, while the private colleges can cost 4x that amount. However, the public tuition is growing at twice the rate as private tuition and as well as the normal price inflation.

Let us take a closer look at the cost breakdown. The COA (Cost of Attendance) is published by each University and it includes tuition and livings costs. The living costs are typically based on the geography than whether the college is a private or public institution. The private and public out-of-state tuition fees are about 3x and 2x that of the public in-state institution. It would cost on an average about quarter of a million dollars to send two children to a public college. The University of California expenses are higher than the national average. The in-state tuition is $14K in 2020, out-of-state is 3x more, and room/board is about $16K a year.

University Endowment Model
Many institutions have big endowments from alumni and other benefactors. These endowments can be a good source for financial aid. Let us look, for example, at the Stanford University endowment fund, which was $28B in 2019. These endowments spend about 5% of their assets to maintain their tax-exempt status. In Stanford’s case, this amount is $1.4B. It covers 20% of their operational expenses and also pays out two-thirds of financial aid, or about $225M. The average need-based aid provided was $50K per student per year. Endowment also provides for tuition scholarship to undergraduate families with income of $125K or less. Endowments can be a good funding source for a generous financial aid program, which, in the case of Stanford, allowed 82+% of its students to graduate with no college debt. Please read our blog “Types of Financial Aid” for a summary of Government-sponsored need-based programs.

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