Why look at a college’s endowment when trying to decide where to go to school? This falls into the category of all other things being equal, why not attend an institution that is in a better financial situation? Or more importantly, why risk going to a university that is facing financial difficulties?

Of course, defining “financial difficulties” isn’t easy. According to a 2012 study by Bain & Company, one-third of colleges and universities are on an “unsustainable financial path” including Harvard and Princeton. Needless to say, the study has some limitations. However, it produced a very cool graphic tool that you can use to identify which schools are at risk at Financial Fade.

Bigger College Endowments Don’t Always Mean More Money for Students

I would like to say that higher endowments mean more money spent on students but that isn’t necessarily the case. For a quick summary of the usual reasons given why endowments shouldn’t be expected to reduce rising college costs, read College Endowments: Why Even Harvard Isn’t as Rich as You Think.

But then again, according to Educause, The Purposes and Uses of Endowment, “40 institutions with endowments greater than $1 billion earned an average three-year return of 11.6 percent. Yet the average payout for this group was just 4.3 percent for fiscal year 2005, a drop from previous years.”

Furthermore, the “Why I Lost My Secretary” study reports that “many universities appear to make deeper cuts than their endowment payout strategies would call for.” The study also found that “Universities cut spending on support staff — secretarial and maintenance positions alike — while not eliminating administrators’ jobs.”

I guess that’s how those with money get more money.

How Colleges Spend Endowments

So how do the universities that have endowments spend the money? People have only been starting to ask that question in the past few years and many are not happy with the answer. In Endowments fund dorms, salaries — and sometimes tuition, Lynn Munson is quoted as saying, “they are used on projects to reflect wealth and self-esteem, not as a functional pot of money.” The article states that

Colleges tend to use endowments for long-term plans and whatever will help attract students. That could be helping to ensure the future of certain positions “” such as 15 athletics department positions at Harvard. It may also be a tuition cut or dorms and facilities that set it apart from other schools.

Remember, in many cases institutions may not have much choice in how to spend the money. According to a GAO study, Postsecondary Education: College and University Endowments Have Shown Long-Term Growth, While Size, Restrictions, and Distributions Vary, only 28% of Harvard’s endowment is unrestricted and endowment expenditures account for 44% of operating expenses. Less than one percent of The University of Texas’ endowment, the largest public school endowment, is unrestricted and accounts for only 5.4% of operating expenses.

So it’s not surprising that you can find universities spending more on students than those that have substantially larger endowments. US News has created an interesting Operating Efficiency Rankingsthat “shows how much each school is spending per student in relation to one point in its overall score and thus its numerical position in the Best Colleges rankings.” Ultimately, “the list shows that high spending per student is not always correlated with the very highest rankings.”

Learn More About College Endowments

The Wealthiest U.S. Universities Got $26 Billion Richer Last Year

However, being wealthy now has a tax: “The new tax law also imposed another cost on some of the wealthiest endowments, requiring them to pay a 1.4% tax on their investment earnings. That new tax affects only private colleges with endowments worth more than $500 million per student—currently about 30, or fewer than 5% of the colleges in the study, although that number is expected to grow in coming years.”

Endowments Boom as Colleges Bury Earnings Overseas

Lots of interesting stuff, not only about “hiding” money overseas. “In a study this year, Dr. Eaton estimated that a trio of tax breaks benefiting universities costs federal taxpayers $19.6 billion a year.” Does it make sense to give tax breaks to donate to already wealthy universities that have a disproportionate share of wealthy students? See the following.

The Push for College-Endowment Reform

Now, what are they using the money for? “…a separate analysis by the Education Trust found that nearly half of the schools with endowments of $500 million or more enroll so few Pell Grant recipients that they are in the bottom 5 percent nationally.”

Tax-Free College Endowments in Crosshairs as Overhaul Looms

Compared the proposed taxes to what has actually happened. “He has floated two proposals: one requiring the wealthiest colleges to funnel 25 percent of endowment earnings to aid middle-class students and the other mandating additional financial reporting on colleges’ tax returns.”

22 Richest Schools In America

“Favorable tax policies and exemptions, unequal research funding and donor tax write offs all play into reinforcing disparities between rich, elite private schools and poorer public institutions.”

Trickle-Down Thinking–Does Anyone Understand Why Universities and Not-for-Profits Have Large Endowments?

More on what exactly is the point of large endowments. “Finding a clearly stated reason or purpose behind these large sums of retained earnings is surprisingly difficult”

Paying Tuition to a Giant Hedge Fund

I really like the idea of auctioning of one admission slot each year. “If all the students disappeared tomorrow—or were forced to pay double their current tuition—the impact would be negligible compared to the crucial fluctuations in the mortgage-derivatives market or the international cost-of-funds index.”

The Endowment Trap

Is there really a good justification for large endowments? “Excess endowments are a non-productive use of society’s limited resources. If a college has excess assets, then it should figure out how to put them to a productive use over the next twenty years.”

This article was written by Michelle Kretzschmar and originally posted on DIYCollegeRankings.com. You can view it here.