Endowment spending

Several reports in the past year have rightfully pointed out that Princeton (along with Stanford, Yale and Harvard) earns enough in investment returns on its endowment each year to more than cover annual operating expenses (with significant amounts of money left over to spend on capital projects or put back into the endowment) and that the University could therefore make tuition 100 percent free for everyone and still make a massive profit.

By the numbers, Princeton’s annual rate of return on endowment investment has been between 15 and 20 percent for the past few years, and has averaged, 10.5 percent per year over the last 10 years (a period that includes the worst financial crisis in modern times). Last year, the 19.6 percent return equated to $2.8 billion, and in future years a similar rate would yield an even higher absolute number. Princeton’s Provost David Lee GS ’99 put the point of this growth best, sayingon the University website that it was “crucial to our ability to sustain the excellence of our teaching and research mission and to continue providing generous financial aid that makes Princeton"s education affordable to any student who is admitted.” Thus one of the explicitly stated missions of the enormous investment machine Princeton runs is to make Princeton affordable to its students (the quote above even originally linked to the Undergraduate Financial Aid website).

By contrast, Princeton’s operating budget has been roughly $1.6 billion per year over the past few years, and it grows at a much slower rate than the endowment does. In raw terms, then, assuming an average endowment growth rate of 10 percent (which is very conservative and assumes that a Great Recession-level drop in the endowment will happen far more frequently than it ever has), the University can cover its operating expenses exclusively off endowment returns, and still have over 40 percent of the endowment returns to reinvest. The University could, to use last year’s numbers, put $1.6 billion of the $2.8 billion in endowment returns to entirely pay off all operating costs, and still have more than a billion dollars leftover to reinvest into the endowment or use on one-time capital projects like new facilities.

And as a nice side-effect of that spending plan, none of us would owe a dime in tuition, room and board or fees.

The benefit to students of this plan seems obvious — students and parents alike would have more money in online casino the present, and wouldn’t be saddled with loans that take decades to pay off. But this system also has some key benefits for the University that merit attention. The first and most obvious is competitiveness in admissions. Princeton continues to enjoy record-breaking admissions numbers nearly every year, and is at no shortage of applicants. Yet it continuously lags far behind Harvard and Yale in admissions yield (the percentage of accepted students who actually enroll). An easy, dramatic and incredibly effective way Princeton could make itself far more attractive relative to other schools is by becoming free seemingly overnight. (Note: Harvard, Yale and Stanford could also afford to become free, though by a much smaller margin and are therefore less likely to do so). A talented, sought-after student admitted to multiple schools, trying to decide which one to attend, is going to be far more likely to come to Princeton over its competitors if his or her family won’t be saddled with hundreds of thousands of dollars in bills.

Beyond raising Princeton’s yield immediately, a free Princeton education would also reap more in alumni donations. The endowment would grow more slowly if this system were in place (since roughly 60 percent of the growth in the endowment wouldn’t be put back into it), but part of the decrease in endowment size would be offset by increased alumni donations. Instead of alumni having to pay off student loans (with interest) to banks (as both Michelle Obama ’85 and Ted Cruz ’92 have admitted to doing, and most of us will never be as rich as either of them), they could instead afford to give (more) money to Princeton. Additionally, young alumni who aren’t saddled with debt have more money to use in starting a new business or pursuing graduate school, both of which can lead to much higher salaries and net worths over the course of their careers. It should go without saying that a richer alumni network will give more to their cherished Old Nassau, especially one that gave them the incredible and unique gift of a free college education.

By taking financial aid to its extreme (but financially viable) conclusion and making Princeton free for all of its students, the University can become an even more attractive option for the talented students we recruit, and can leave its students and alumni free of an enormous burden that allows them to more fully realize their career potential.