Managing Private College Finances in an Environment In Which Spending and Revenues Grow at Different Rates

Recently, spending and fees at colleges and universities have been rising faster than family incomes. If this trend persists, increasing emphasis will be placed on endowments as a source of finance. This paper examines financial planning when growth rates for the sources and uses of funds differ. First, we examine concepts of "intergenerational equity" in such an environment (i.e., what is an equitable growth in comprehensive fees?) and then we show how the different concepts relate to the long-run sustainability of the institution. With differences in growth rates, long-run sustainability is a dynamic programming problem where rules of thumb such as "spend the real return on the endowment," or "keep the endowment a constant multiple of spending," have little relevance. We illustrate these points with numerical simulations of the dynamic problem that can be implemented with Excel.