Are rich colleges better? Can colleges buy a reputation for high quality? In a word, yes -- but within limits. We looked at endowments of 650 universities and related that to reputation, as measured by the 2015-16 Forbes Top College list. As the graph below shows, schools that had large endowments typically ranked high among the 650 schools Forbes ranks, while those with meager accumulation of wealth tended to be among the lower ranking schools.
Having more money allows universities to hire more and better professors, and through scholarships obtain high quality students that are not likely to drop out -- important factors in the Forbes rankings. Better students on average also make good employees, and the Forbes ranking also depend on postgraduate earnings. So rich universities use a lot of their resources to buy reputation by offering high quality instruction and also by financing high powered research among their faculty.
Are rich school cheaper? Not much. We find that, after controlling for other things, only a small proportion (typically 10-15%) of endowment resources actually work to lower costs to students. Stated tuition fees are actually higher at highly endowed schools. The school with the greatest endowment per student, Princeton University, has a walloping $2.8 million in endowment per student. If the school spends five percent annually from its endowment, it has $140,000 for every student to spend. Yet Princeton is one of the nation’s most expensive schools, with a tuition of $40,170. But there is generous student financial aid, so the net price (after scholarships) is actually somewhat lower for most students than at lowly endowed schools.
There are a few schools that use their endowment predominantly to lower the cost (sticker price) to students--and they seem to pay a price for that policy. Kentucky’s Berea College has the 18th highest amount of endowment per student in the country, but ranks only 305th (almost in the middle) in the Forbes rankings--but it effectively charges no tuition. Similarly, New York City’s Cooper Union historically has not charged tuition (it has been forced to charge some lately), and has the 15th highest endowment per student in the country, but ranks only a highly respectable but not superlative 73rd on the Forbes list.
By contrast, 9 of the top 10 schools on the Forbes Top College list are also in the top 10 schools in endowment per student. Schools who use their wealth to keep costs low like Berea do not have the resources to devote to securing an absolutely stellar reputation. There is a trade-off between reputation and providing low cost accessibility--and most schools put an emphasis on building reputation.
But endowments are not everything. Compare two very good Ohio liberal arts colleges, Kenyon and Denison. Kenyon is ranked 48th, well above Denison’s 96th. Yet Denison has roughly 2.7 times as much endowment per student. Similarly, Minnesota’s Carleton and Iowa’s Grinnell College both have fine reputations, but Grinnell is far wealthier, having the 9th highest endowment per student of all schools. Carleton, however, outranks Grinnell by a healthy margin (30th vs. 65th). Among state schools, the University of Texas, Austin is easily the richest university, with an endowment of $25.4 billion. While Forbes ranks it highly (82nd, and 13th among public universities), it is still well below much lower endowed schools like the University of California, Berkeley (ranked 35th, and 3rd among public universities) or the University of Michigan, Ann Arbor (ranked 41st, and 7th among public universities).
Money matters--but schools cannot become respected by wealth alone.
Richard Vedder directs the Center for College Affordability and Productivity and teaches at Ohio University, where Justin Strehle is a student majoring in economics.
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