by Adina Spertus-Melhus, Fall 2015
- Revenue and Expenditures
- The Endowment
- Divestment
- Alternative Endowment Spending Proposals
- The Rising Cost of Tuition
- Financial Aid
Revenue and Expenditures
Despite the fact that Swarthmore College only has around 1,500 students enrolled,[1] the College’s operating expenses for the 2014-2015 year totaled $137,963,000. Most of this was paid for between student tuition, room, board, and fees ($89,149,000), and from money withdrawn from the endowment ($60,645,000).[2]
The second largest source of revenue comes from the College’s $1,863,800,000 endowment (as of the end of 2014). The College profits off of this fund’s investment returns, withdraws a small portion of the endowment on a yearly basis. This goes towards Swarthmore’s yearly budget, and is known as the “endowment spending,” often expressed as a percentage of the total, or a “rate.” In the 2014-2015 year, endowment spending covered about 40% of Swarthmore’s operating budget. (For more information, see The Endowment.)
Compared to student payments and endowment spending, private donations and government contributions play a small role.
So where does this $138 million go? More than half ($83,180,000) is spent on compensation. In the 2013 calendar year, the College reported paying 2,605 employees.[3] If you subtract the 1,100 student workers,[4] this leaves around 1,500 other employees. In the 2014-2015 year, the college employed 175 full time faculty members, and 30 part time. Of the more than 1,000 other employees, many are likely to be receiving hourly wages for part time positions. (For more information on employee/administrational body size, see The Rising Cost of Tuition.)
For the 2014-2015 academic year, the College spent nearly $30 million on student aid, an expense expected to rise in coming years. Swarthmore is actively working to recruit more low-income students: 58% of the class of 2019 is aided, compared to 52% of the class of 2018. (For more information, see the following sections: The Rising Cost of Tuition and Financial Aid.)
The Endowment
Swarthmore has one of the highest endowments per student for a college or university in the United States (#6 in 2014).[5] Most Swarthmore students know that the College endowment is large. They might not know that it’s greater than the individual GDP of 25 countries,[6] or more than the individual worth of most NBA team franchises.[7]
But even if the Board of Managers decided that buying a basketball team (or maybe a football team) was the best thing they could do for the College, full liquidation of the endowment would not be an option. The endowment is composed of hundreds of funds.[8] Most of these can be used for the general budget, however, certain funds are reserved a specific costs, like endowed chairs (for a specific faculty position).
The Board of Managers, a.k.a. “the Board,” has around 40 members [9] who are responsible for making decisions about the College budget.
The Board approves recommendations made by the investment committee, which is composed mostly of Board members.[9] One of their decisions is how much money will be withdrawn from the endowment in a given year, which determines the endowment spending rate. The College reports the following endowment spending policy:
Over the long-term endowment spending, as a percent of the endowment market value (i.e. spending rate), is targeted to average within the range of 3.5% to 5.0%. [10]
However, as noted by Physics Professor Peter Collings in his 2014 Phoenix piece The inequity of Swarthmore’s endowment: An open letter to the Swarthmore College community, the actual spending rate is closer to 3.5-4.25%, or perhaps one with an even smaller lower bound.[11]
The average spending rate in 2014 for colleges and universities with endowments greater than $1 billion was 4.6%.
Vice President of Finance Gregory Brown attributes this trend in recent years to overestimation of student aid needs. When the Board approves the budget, they don’t know exactly how much financial aid will be needed for the incoming first year class. The College, specifically through the Admissions Office, has been trying expand access to Swarthmore. In the past few years, initiatives to attract more students from low-income backgrounds have proven less successful than anticipated when drafting the yearly budget, so the need for aid was lower than the amount allocated. This surplus of unused expenses was returned to the endowment (or more accurately, was never taken out in the first place), and contributed to a lower endowment spending rates for those years.
With an increasing number of students expected to be on aid in future years, as well as the increasing price of the College’s expenses (for more information, see The Rising Cost of Tuition), V.P. Brown anticipates Swarthmore’s endowment spending rate will increase going forward.
While financial aid oversight might play a role in the low spending rates of recent years, it fails to account for the nearly 30-year trend of low endowment spending as described by Professor Collings. Swarthmore has a history of conservative behavior surrounding its endowment.
Divestment
With regard to financial boycotts, divestment is the act of eliminating an organization’s investments in a certain industry, to apply financial and social pressure against that industry.
In the late 1970s, Swarthmore students began organizing a divestment campaign from apartheid South Africa. Tactics included petitions; educational events, like anti-apartheid speakers and films; as well as direct actions including sit-ins, vigils, a die-in, and marching into a board meeting. Despite explicit student pressure since 1978, it wasn’t until 1990 that Swarthmore College was fully divested from South Africa, two years before the abolition of Apartheid in 1992.[12]
However, following this decision to divest, the Board of Managers made a public commitment to never repeat the action. Since 1991, the investment policy has stated that the “Investment Committee manages the endowment to yield the best long term financial results, rather than to pursue other social objectives.”[13]
Today, many students are engaged in a similar campaign. In 2010, Swarthmore’s Mountain Justice (MJ) began urging the College to divest from fossil fuels, specifically the 200 companies with the largest fossil fuel reserves.[14]
In May 2015, following MJ’s month-long sit-in, the Board met to reconsider fossil fuel divestment, which they had rejected in 2013. The following is an excerpt from the statement following the meeting:
After long and deep discussion and debate, the Board decided not to modify its investment guidelines to allow for use of the endowment to meet social objectives. This decision effectively ratifies the Board’s September 2013 decision not to divest from fossil fuels, either on a full or partial basis.
We believe that the donors to Swarthmore College over the last 150 years have assigned to the Board the obligation to steward our endowment carefully in order to fulfill our mission to educate students.
The major opposition to fossil fuel divestment has emerged from concerns of cost and the financial security of the endowment. The College has publicly estimated potential yearly costs in the millions,[13] while MJ argues that divestment will actually protect the endowment from the risks of the fossil fuel industry.[15] Unfortunately it is difficult to disentangle their calculations from each group’s vested interests. Following the May 2015 meeting of the Board, reports suggested that perhaps the Board’s biggest concern was the risk of a “slippery slope” effect.[16] Even if fossil fuel divestment would not have a significant financial impact, the Board may be more concerned with avoiding any expectations of socially responsible investment. For example, faced with pressure to divest from Israel, the College could face polarization in donor support, losing donations either by divesting or not.
Other colleges and universities have divested from fossil fuels, both partially and fully,[17] but some members of the Board, as well as other members of the Swarthmore community,[18] remain wary of the financial implications. Between the rising costs of the College (see The Rising Cost of Tuition), expected increases in financial aid needs (see Financial Aid), and perhaps most importantly the Board’s conservative history (both in endowment spending and past divestment) the lack of fossil fuel divestment at Swarthmore is not particularly surprising.
Alternative Endowment Spending Proposals
There are, however, other ways to consider the situation. Endowment spending and divestment are highly linked: If divestment were to lead to lower returns on the endowment, a higher spending rate would be necessary to meet the College’s needs. The Board is concerned about both, but some argue otherwise.
In Spring 2014, Economics Professor Mark Kuperberg shared Endowment Spending from First Principles, in which he critiqued the College’s spending rule, calculating that “[a]mazingly over the last 10 years, the College could have spent a whopping 7.22% of the endowment each year and still have maintained a constant Endowment Support/Budget ratio.”[19] (The concept of a constant Endowment Support/Budget ratio is that the amount withdrawn from the endowment remains proportional to the budget over time, for the sake of intergenerational equity.) Professor Kuperberg cautions to not take this conclusion as evidence for changing our target, endowment spending rate to 7.22%, but that it shows the College should strive towards a higher endowment spending rate over time.
Even more radically, there have been calls for forced endowment spending in the United States. In 2014, through an article published in the New York Times, University of San Diego School of Law Professor Victor Fleischer suggested a Congressional requirement that all universities with endowments greater than $100 million to spend at least 8% of their endowment every year. Based on his calculations, he believes that this would be a sustainable rate, even though it means endowments would grow more slowly.[20] New York Republican Representative Tom Reed recently announced that he is drafting legislation to require colleges to spend investment earnings on financial aid as a condition for the endowment’s tax-free status.[21]
Vice President of Finance Greg Brown cautioned that these proposals could lead to unintended consequences for higher education institutions in the United States. Swarthmore, as a small liberal arts college, operates on the bad end of the economies of scale concept. The College has many departments that require the same investments a larger program would demand, without being able to apply it to a large number of students. V.P. Brown expressed concern that if colleges and universities in the United States were required to lower costs, this could force greater specialization on the part of institutions as well as for students, thereby restricting opportunities for liberal arts experiences. As a result, he hypothesizes that higher education could follow a model more similar to that of Europe or China, where costs are low, but students must choose a field earlier on and have less freedom to study outside of their department.
Higher education is inaccessible to many Americans due to social inequity and increasing economic polarization. If universal access to higher education (as well as options for appropriate vocational and technical training) could be achieved at the cost of the small, liberal arts college experience, perhaps that would be a just and necessary exchange. As it stands now, however, the College works to combat this inequity by finding means of recruiting students from low-income and traditionally marginalized backgrounds. This becomes increasingly important as the price of Swarthmore tuition grows dramatically.
The Rising Cost of Tuition
As the graph below demonstrates, the sticker price of a year at Swarthmore (the red line) has more than doubled in the past 20 years. Using the U.S. median family income (the blue line) as a relative comparison for inflation, in terms of earnings, the trends are not parallel. This is because the cost of college education increases at a rate typically 3.4% higher than that of inflation.[22]
The relatively stable net price after financial aid (the green line) makes this stark jump in tuition less alarming, but what would happen if the price of Swarthmore continued growing at the rate illustrated above? More and more students would require aid, until, potentially, the vast majority of the Swarthmore student body would be aided. At Grinnell College, a small liberal arts school with a $1.8 billion endowment[23] (sound familiar?), 90% of the student body is currently on financial aid.[24] At Swarthmore, 52% of students are aided.[25] Grinnell’s endowment covers about 55% of the college’s operating budget, compared to 40% at Swarthmore. (Grinnell students have also, so far, been unsuccessful in convincing their college to divest from fossil fuels.[26])
The more the cost of attending Swarthmore rises, the more the College will need to subsidize tuition. Because the College’s expenses are significantly greater than what they bring in from student tuition, room, board, and fees, technically Swarthmore is subsidizing the cost of educating all students, including those not on financial aid.
One widely touted justification for the rising of college prices is state funding cuts. Technically, state funding for higher education has actually increased, while funding per student has only slightly decreased since its peak in the 1990s.[27] This has a bigger impact on large state schools and research universities.
The other common explanation for rising tuition prices is expansion of College administrations. According to a 2014 analysis, college and university administrational bodies have more than doubled in the last 25 years.[28] With staff size growing faster than student body, it’s not surprising that costs would go up. According to this same analysis, between 1987 and 2015, Swarthmore’s administration had grown by 1,450%, while the student body size (until recently) and the number of faculty positions have remained relatively constant. (Keep in mind that in 1987 Swarthmore only had 6 full-time administrators).[29]
Expansion in the administration has been partially driven by the need for compliance with new federal laws. V.P. Brown noted that often these increased regulations, (for example a Title IX coordinator,) are not backed by increases in federal funding, leaving the burden of cost on the College. Rising costs for health care, coupled with the increasing number of full time employees has driven expenses up further in recent years.
As a small liberal arts school, Swarthmore needs to remain relevant in departmental offerings while still maintaining a liberal arts core. Even as student interest in majoring in the Natural and Social Sciences increases, the College can’t simply gut its Humanities departments.[30] (However, the College’s tenure-line policy does allow for more flexibility in faculty size across departments; when a tenured professor retires, their tenure-track position is not automatically held within their department.) This pressure for departmental relevance is back dropped by out-of-date facilities. The new Biology, Engineering, Psychology (BEP) Building will improve infrastructural relevance, but at a cost of over $100 million.[31]
More specific to Swarthmore, the price increase can be partially attributed to our faculty body composition. A disproportionate number of professors have been with the College for a long time, compared to new faculty hires. Between retirement payouts and the approximate doubling of a professor’s salary during their career, older professors cost the College more. Swarthmore is currently about half-way through a 28 position faculty expansion process. For Swarthmore to maintain it’s 8:1 faculty to student ratio while the faculty course load has dropped[32] and the student body is slowly growing,[33] hiring new faculty members is a necessary cost. These faculty-related costs are expensive to the College right now, but they will theoretically settle in coming years.
But what about the costs that are continuing to increase, like health care coverage or keeping the College’s facilities up to date? V.P. Brown predicts higher education in the U.S. will start seeing decrease in the growth rate (note that this is not a decrease) in tuition prices, because the current rate of growth is not sustainable (see graph above comparing median family income and Swarthmore’s sticker price). As a result, V.P. Brown expects Swarthmore to become more reliant on the College endowment in the budget, especially with the financial need of the student body expected to increase. Perhaps in future years, Professors Collings and Kuperberg’s suggestions will become the reality.
Financial Aid
Swarthmore’s need blind admissions policy and its promise to meet full need have earned praise from students and outside organizations.[34] However, the costs of paying tuition still prove burdensome for many students.
When students need to take out additional loans, or even take semesters off for financial reasons, it’s difficult to believe that all students’ full financial need is really met.
At Swarthmore, 100% of those who demonstrate need for our help are offered our help; students are offered all that they need, based on our analysis of the family’s financial situation.[35]
Students have expressed frustration in recent Facebook threads and campus publications, some sharing their stories of insufficient aid allocations and difficulties dealing with the financial aid office. One recurring complaint is that some students believe their aid dropped after Freshman or Sophomore year from what they were offered as an incoming student. However, there’s probably not enough evidence determine a trend from individual stories alone, when outside factors like an older sibling leaving college or family financial changes make each story unique.
Recently, the Daily Gazette conducted an investigation into whether the College was offering a “bait and switch” to incoming students,[36] citing the phenomenon as a known practice in U.S. higher education institutions.[37] They conducted a survey on Seniors’ year-by-year aid packages, finding a decline in average aid after freshman year.
However, these results were not statistically significant, came from a small sample (of what appears to be 28 or 29 students), and run the risk of response bias.
As par of this project, I conducted a review with a similar goal, but based it off data from the College’s yearly Common Data Sets (CDS). The CDS provides information on average financial aid allocations to first year students and average allocations to all students. With a little bit of math, this can be used to compare aid given to Freshmen and non-Freshmen (Sophomores, Juniors, and Seniors). But because in any given year the intensity of student need may vary, it’s problematic to compare average aid awards between class years. To avoid this problem, the “predicted” amount a non-Freshman would pay in any given year was calculated based off the aid given to first years from the previous three years. (Sophomores, Juniors, and Seniors will always be the sum of the Freshman classes of the previous three years.) This was adjusted for inflation, and compared to what the non-Freshmen actually paid in those years. (See Methodology for more information on the calculations, and to download the spreadsheet.)
The column to the right below displays how much more or less the aided non-Freshmen (for the given academic year beginning in 2004 to 2014) paid than what was predicted based off the amount that the aided Freshmen from the previous three years paid. This would be expected to increase for a student not on financial aid, as the cost of attending Swarthmore increases ever year, but should not apply to students with financial need. Similarly, personal fluctuations in family finances (for example, a sibling going into or leaving college) should balance out.
| Year | [Amount Paid] – [Amount Predicted to Pay] |
| 2014 | $1,756 |
| 2013 | $1,885 |
| 2012 | $1,225 |
| 2011 | $882 |
| 2010 | $680 |
| 2009 | –$420* |
| 2008 | –$363* |
| 2007 | $2,756 |
| 2006 | $1,801 |
| 2005 | $1,435 |
| 2004 | $1,449 |
*In 2008 and 2009, more aid was given to Sophomores, Juniors, and Seniors than predicted based on the aid given to Freshmen from the previous three years. This is likely due to the 2008 financial crisis.
As for all other years, on average, the non-Freshmen paid more than they were predicted to pay based on the aid they received their Freshman year. (As discussed on the Methodology, this takes into account the Summer Earnings Requirement difference between Freshman and Sophomore/Junior/Senior year.) If the determination of need and allocation of financial aid is held constant throughout a student’s time at Swarthmore, we should expect the values of the righthand column above to all be very close to zero (with the exception of a few years after 2007), with about an equal number slightly below and slightly above zero.
While we don’t know why non-Freshmen’s aid is, on average, lower than expected, it raises questions. Going forwards, it would be interesting to see if this trend continues, although it will become more difficult to calculate with the College’s new policy to only partially discount outside scholarships.[38]
Footnotes & Sources:
[1] Swarthmore College Common Data Set 2014-2015
[2] Swarthmore College Consolidated Financial Statements June 30, 2015 and 2014
[3] Swarthmore College 990 Tax Return for Public 2013-2014
[4] Office of Student Engagement, http://www.swarthmore.edu/student-employment
[5] 2014 NACUBO-Commonfund Study of Endowments
[6] Cabo Verde, San Marino, Central African Republic, Belize, Djibouti, Seychelles, St. Lucia, Antigua and Barbuda, Solomon Islands, Guinea-Bissau, Grenada, St. Kitts and Nevis, Samoa, The Gambia, Banuatu, St. Vincent and the Grenadines, Comoros, Dominica, Tonga, São Tomé and Príncipe, Micronesia, Palau, Marshall Islands, Kiribati, & Tuvalu.
Source: International Monetary Fund, 2014
[7] http://www.forbes.com/sites/kurtbadenhausen/2015/01/21/average-nba-team-worth-record-1-1-billion-2/].
[8]http://www.swarthmore.edu/Documents/administration/finance_investment_office/cost_of_divestment.pdf
[9] http://www.swarthmore.edu/board-managers/managers
[9] http://www.swarthmore.edu/board-managers/investment
[10] http://www.swarthmore.edu/finance-and-investment-office
[11] http://swarthmorephoenix.com/2014/03/20/the-inequity-of-swarthmores-endowment-an-open-letter-to-the-swarthmore-college-community/
[12] http://nvdatabase.swarthmore.edu/content/swarthmore-college-students-win-divestment-apartheid-south-africa-1978-1989
[13] http://www.swarthmore.edu/board-managers/sustainability-and-investment-policy
[14] http://swatmj.org/ourcampaign/#ourproposal
[15] http://swatmj.org/ourcampaign/#feasible
[16] http://swarthmorephoenix.com/2015/10/01/15136/
[17] http://www.theguardian.com/environment/2015/may/18/oxford-university-rules-out-investing-in-coal-and-tar-sands
[18] http://daily.swarthmore.edu/2015/04/03/the-true-cost-of-divestment/
[19] Kuperberg, Mark. Endowment Spending from First Principles. April 2014.
[20] http://www.nytimes.com/2015/08/19/opinion/stop-universities-from-hoarding-money.html
[21] http://www.bloomberg.com/news/articles/2015-10-07/house-panel-questions-college-endowment-spending-tax-benefits
[22] http://trends.collegeboard.org/content/average-rates-growth-published-charges-decade-0
[23] http://www.marketwatch.com/story/how-tiny-grinnell-colleges-endowment-outperformed-the-ivy-league-2015-05-20
[24] https://www.grinnell.edu/financial-aid
[25] http://www.swarthmore.edu/admissions-aid/financial-aid-and-cost-information
[26] https://www.facebook.com/divestgrinnell/info/?tab=page_info
[27] http://www.nytimes.com/2015/04/05/opinion/sunday/the-real-reason-college-tuition-costs-so-much.html?_r=1
[28] http://www.huffingtonpost.com/2014/02/06/higher-ed-administrators-growth_n_4738584.html
[29] http://daily.swarthmore.edu/2015/04/30/swarthmore-administration-grows-rapidly-garners-concern/
[30] http://daily.swarthmore.edu/2015/03/06/humanities-honors-programs-in-decline/
[31] http://www.swarthmore.edu/news-events/board-managers-approves-new-facilities-adopts-sustainability-framework
[32] http://swarthmorephoenix.com/2014/02/14/professors-course-loads-to-be-decreased/
[33] http://daily.swarthmore.edu/2015/01/19/college-to-continue-slow-steady-growth-pattern/
[34] http://www.kiplinger.com/slideshow/college/T014-S003-10-best-values-in-liberal-arts-colleges-2015/index.html
[35] http://www.swarthmore.edu/admissions-aid/frequently-asked-questions
[36] http://daily.swarthmore.edu/2015/12/09/does-swarthmore-bait-and-switch-financial-aid/
[37] https://www.washingtonpost.com/news/grade-point/wp/2015/09/01/are-we-nearing-the-end-of-college-tuition-pricing-as-we-know-it/
[38] http://www.swarthmore.edu/financial-aid/outside-scholarships