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University submits statement on endowments to Senate committee

Princeton University has submitted a written "statement for the record" to the U.S. Senate Finance Committee describing how it uses its endowment to support financial aid.

The action follows a Sept. 26 committee hearing during which Princeton officials were concerned that witnesses "presented an incomplete and misleading account of the operation and uses of university endowments, particularly with respect to financial aid."

The statement, submitted on Oct. 5, is printed in its entirety here:

Statement for the Record
Hearing on Offshore Tax Issues: Reinsurance and Hedge Funds
September 26, 2007

Submitted by:
Robert K. Durkee
Vice President and Secretary
Princeton University
Princeton, New Jersey 08544


Chairman Baucus, Senator Grassley, and Members of the Committee: Thank you for the opportunity to submit this written statement on behalf of Princeton University. My name is Robert K. Durkee and I am the Vice President and Secretary of the University.

Princeton is concerned that the witnesses at the committee's September 26th hearing on issues surrounding university endowments presented an incomplete and misleading account of the operation and uses of university endowments, particularly with respect to financial aid. While the comments below will focus specifically on Princeton, I believe that the witnesses' broader mischaracterizations of endowments will be addressed in testimony that is being submitted on behalf of several higher education associations of which Princeton is a member.

Financial Aid

Princeton University was founded in 1746 and one of its earliest endowed funds, dating back to the 18th century, was for financial aid. Today, more than half of Princeton's undergraduates and essentially all of its graduate students receive financial aid.

For many decades Princeton's need-based aid program for undergraduates has been among the strongest in the country. Princeton admits all undergraduates on a need-blind basis and meets the full need of each student who qualifies for aid. Beginning in 2001, student loans have been entirely replaced with grant increases for all students on aid. Princeton also has reduced the summer earnings expectation for students from lower- and moderate-income families. It has reduced the amount that students are expected to contribute from their own savings. It has reduced expected parental contributions by removing home equity from consideration (and giving an equivalent renter's allowance to those who don't own homes). Most recently, last year Princeton reduced term-time job requirements in all aid packages and increased the board allowance for juniors and seniors to reflect actual costs.

These enhancements have been made possible by Princeton's commitment to financial aid as a matter of policy and by excellent stewardship of its endowment over many years. Princeton's endowment is made up of more than 3,500 separate accounts, many of which are restricted to specific purposes, such as faculty positions, academic programs, and student aid. The purpose supported by the largest number of accounts is undergraduate financial aid, and funds from unrestricted accounts are also used to cover the costs of our aid program.

Because financial aid is such a high priority for Princeton, it treats its financial aid budget as an entitlement, not an appropriation. Since Princeton places no limit on the number of aid applicants who can be admitted each year under its need-blind admission process and since it meets the full need of every admitted aid applicant (with grants, not loans), its aid budget fluctuates each year to provide whatever is necessary to carry out this policy. Moreover, because financial aid at Princeton is based solely on a family's ability to pay, annual tuition increases do not in any way increase the amount paid by students on financial aid.

The results of these policies have dramatically broadened the economic diversity of Princeton's student body. For example:
  • Fifty four (54) percent of this year's entering freshman Class of 2011 is receiving financial aid and their average grant award is $31,187. (Tuition is $33,000 and tuition plus room and a full board contract is $43,980.) In contrast, for the class that graduated in 2001, 38 percent was on financial aid and the average grant award was $15,000.
  • This comparison shows a 55 percent increase in the number of students receiving aid over this period of time and a 100-plus percent increase in the average grant. Grants have risen faster than tuition increases, so while the average grant covered 65 percent of tuition for the Class of 2001, it now covers 96 percent of tuition for the Class of 2011. Over this same period, students from low-income families (incomes under $53,500 in 2011) have more than doubled, and they now constitute 15 percent of the freshman class. Eleven (11) percent of the members of this year's freshman class are the first in their families to attend college.
  • Princeton's financial aid program also supports middle-income families and even upper-middle income families with multiple obligations. For example, nearly all families with incomes between $100,000 and $140,000 who applied for aid this year qualified and they received average grants of $26,480. Of families with incomes between $140,000 and $200,000 who applied for aid, 90 percent qualified for an average grant of $18,080. Even families whose income levels allow them to pay Princeton's full annual fee are paying only about half of what it costs to provide their children with the kind of education Princeton offers. This is reflected in the fact that more than half of Princeton's $1.2 billion operating budget is supported by spending from the endowment (44 percent) and annual gifts (8 percent). If you exclude funding for sponsored research and net out expenditures for financial aid, the fraction of the budget supported by endowment earnings and gifts is 78 percent. Princeton held tuition level this year (while increasing charges for room and board to reflect actual costs), but it has not believed that families that can afford to help pay for their children's educations should not be asked to do so.
  • Because of Princeton's no-required-loan policy, student debt at graduation has plummeted from $13,820 for the Class of 2001 to an expectation of $2,700 for the Class of 2011. This borrowing is entirely voluntary since students are not required to borrow as part of their financial aid package.

To fund its extensive aid program, Princeton relies heavily on its own resources. More than 92 percent of the University's $81 million scholarship budget for 2007-8 is being provided from University endowed and yearly sources, especially annual gifts from alumni, and more than 80 percent—more than $65 million—is from the endowment. By contrast, only about 3 percent (about $2.5 million) of the scholarship budget comes from federal programs. Strikingly, the University's scholarship budget this year is greater than its net tuition revenues; while the scholarship budget is $81 million, its net tuition revenue is only $75 million.

Princeton is able to offer such a generous financial aid program because of the generosity of donors who have contributed to the endowment and donors who make annual gifts for financial aid, and because of the exceptional performance of the endowment over many years. Princeton's endowment income spending policy calls for a stipulated increase in spending each year from each endowment account, with a target spending rate between 4 and 5.75 percent. Under this policy, payout rates vary (up and down) with changes in the value of the endowment. Our current payout rate is well within the range at roughly 4.6 percent.

We have done careful and extensive research that suggests that the range we have adopted will allow us to maximize current spending while also sustaining the purchasing power of the endowment into the future so we can continue to honor our current commitments and meet new needs as knowledge increases and new fields emerge. This research also confirms the wisdom of allowing for fluctuation across the range rather than locking in a specific percentage, especially for institutions, like universities, that require short- and long-term stability so they can make long-term commitments. While grant-making institutions, like foundations, can adjust their allocations downward in lean years, universities need to be able to sustain their commitments even in challenging financial times.

In fact, when endowment spending represents a large share of an operating budget's revenues as it does at Princeton, it is especially critical that there be stability in the dollar amounts spent from year to year. If spending levels are sustained, then spending rates (dollars spent per unit of endowment divided by unit market value of the endowment) will fluctuate with the endowment's unit market value. One consequence is that contrary to what was suggested by one witness, these institutions must spend at higher, not lower, rates during periods of weak investment performance. This need for stability in the dollar spending stream means that spending rates will drift down when investment returns are strong. When investment returns are especially strong over a period of time (as they have been recently), Princeton's policy is to make upward adjustments to remain within its target range, and it has made these adjustments nine times in the past 30 years (including three times in the past 18 months). A major beneficiary of these adjustments has been financial aid.

Other Endowment Spending

Princeton is a major research university that is distinctive in its commitment to undergraduate teaching, and it relies on its endowment to provide an educational program that is based on extensive interaction between students and faculty. The ratio of full-time undergraduates to faculty members is 5:1, and every senior must complete a thesis or similar project based on original research, working directly with a member of the faculty. All faculty members at Princeton teach (including the president), and the teaching program is supported by one of the world's most distinguished research libraries; its holdings include more than 6.5 million books, 6 million microforms, 30,000 linear feet of manuscripts, and distinguished holdings of rare books, prints, archives, and other materials that require special handling. The teaching program is also supported by an excellent art museum, laboratories and other classroom spaces, and information technologies that are now indispensable to teaching and learning. Princeton also offers its students extensive opportunities to develop their talents and leadership skills through extracurricular, athletic, and community service programs.

Princeton takes very seriously its obligations to manage its endowment in a manner that will achieve a sustainable balance between providing as much support as possible for the current generation at Princeton while also building capacity to meet future needs. Spending levels must permit sufficient reinvestment of revenues so that, over time, the per-unit value of the endowment keeps pace with rising costs and the University is able to provide each new generation of students with an education that encompasses both the newest technologies and the newest fields of knowledge.

This country's leading universities rank among the best in the world, and they have achieved this position, in part, through the generosity of their donors and the careful stewarding of their resources. Their investment and spending policies must reflect long-term earnings experience (over lean years as well as favorable ones), although, as already noted, periodic upward adjustments in spending can be made and are made in response to exceptionally strong short-term performance. These policies also must provide long-term stability since universities, unlike foundations, must be able to make long-term commitments to faculty (many of whom are world leaders in their fields), academic programs, and to the facilities (including state-of-the-art laboratories and libraries) that are essential to world class teaching and research.

A Princeton trustee summarized the obligations of the trustees, who are charged with ultimate responsibility for managing the endowment and adopting the annual budget, as follows: "One of the most important responsibilities of the trustees is to try to find the right balance between achieving the highest possible standards of excellence for this generation and ensuring the University's financial capacity to continue to achieve those standards for future generations." Princeton's provost, Christopher Eisgruber, has written: "Our spending policy serves to provide budgetary stability, but even more important, it is designed to ensure intergenerational equity. It would be inappropriate for Princeton to spend so much today that it could not offer comparable opportunities to later generations of students and researchers. And conversely, it would be inappropriate to deny new opportunities to Princetonians today in order to focus exclusively on their successors."

In addition to expenditures on financial aid, Princeton uses its endowment and annual gifts to help meet the significant and expanding human and capital needs of a community devoted to the discovery, preservation, and transmission of knowledge. There are thriving fields at Princeton today, ranging from computer science to nanotechnology and from environmental studies to genomics that could not have been imagined even 25 years ago, and there are emerging fields now, with neuroscience as a prime example, that are poised to make transformative discoveries over the coming years. If we want these discoveries to be made in this country and want our students to be educated by leaders in these fields, our leading universities have to be able to invest not only in the research, but in the faculty, students, and facilities needed to conduct the research. Strong endowments make these investments possible, along with investments that strengthen teaching programs in other ways, such as Princeton's program that requires each undergraduate to participate in specially designed writing seminars to make sure they learn to write clearly, cogently, and persuasively.

In short, many of the needs of a major research university such as Princeton could not have been anticipated years ago. Princeton's careful management of its endowment has allowed it to meet these needs, while also opening the doors to Princeton wider than ever to students from all economic backgrounds. This country has been well served by encouraging taxpayers to make contributions to universities so they can strive for the highest standards of excellence and opportunity, and by expecting that universities will manage and utilize their resources responsibly in pursuit of these objectives.

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