SO NICELY ENDOWED!

To get an idea of the benefits of a robust endowment, consider Emory's experience in the late 1990s. With the financial markets booming, its endowment ballooned from $2.2 billion in 1995 to $4.8 billion in 2000. The resulting windfall helped fund more than $1 billion in construction projects: a math-and-science center, a student-housing complex and a performing-arts center. Emory also hired professors and boosted student aid. Says chief financial officer Michael Mandl: "We would not have been able to do all that without those boom years."

That spending spree illustrates the enviable edge enjoyed by those colleges with a hefty pool of investment income to draw from. The bigger the endowment, the less reliant a university is on tuition and, in the case of a public school, state appropriations. Yet for all the perks an endowment provides, lower tuition isn't one of them, since colleges prefer--and are often required--to spend the money on improving educational quality.

Endowments are an odd financial duck, needing to meet two competing objectives: preserving their long-term value by keeping up with inflation, but also providing a steady stream of income to help run an institution. University business officers invest in everything from stocks to real estate, maintaining a diverse portfolio to guard against a slump in a single category.

Harvard, for instance, in 2003 reaped a 12.5 percent return on its investments. It skimmed off 5 percent of the total endowment--a typical amount--yielding about $770 million for a $2.4 billion budget. Yet when it comes to spending those dollars, there's a wrinkle. Like other institutions' endowments, Harvard's isn't a single fund, but a collection of more than 9,400 individual funds (some being for the medical school, others for a library and so forth), each with its own restrictions on usage--say, for finan-cial aid or for a particular professorship.

Nationally, because of the economic downturn that began in 2000, endowments--which range from Georgia Perimeter College's $321,000 to Harvard's $19 billion behemoth (as of June 2003)--have shrunk. But they returned to modest growth in 2003, with an average investment return of 3 percent.

Endowments grant the richest universities powerful advantages. For one, they allow them to improve educational quality by lowering faculty-student ratios and luring luminaries with higher salaries. Stanford's endowment--the fifth largest--helped pay for a massive investment in undergraduate education during the 1990s. Another boon has been the ability to disburse financial aid to coveted applicants. Princeton--which boasts the largest endowment per student of any major institution--used its wealth to eliminate student loans from aid packages in 2001. "All of this enhances the brand of the institution," says Louis Morrell, vice president for investments at Wake Forest. That, in turn, permits colleges to increase tuition--notwithstanding a large endowment.

The wealth gap is growing. On average, the largest endowments earn higher returns because they often invest in riskier but potentially more lucrative vehicles, like hedge funds. Over time the differences in income can become "mind-boggling," says Ronald Ehrenberg of the Cornell High-er Education Research Institute. That, he explains, only exacerbates inequities, creating a super-elite among private universities and a yawning divide between private and public institutions.

At Yale, which has the second largest kitty, endowment spending quadrupled over the past decade, as well as growing from 14 to 30 percent of the budget. Contrast that with a public institution like the University of Colorado, where state support has dwindled from 25 percent of the budget in 1990 to about 9 percent currently. Since its endowment can't come close to making up the difference, the only option is raising tuition. Faced with such quandaries, public institutions are trying to build up their endowments with ambitious capital-raising campaigns. Unfortunately, they've got a long way to go.