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Rich Get Richer, and the College, Too

If you call up your banker right now and ask to invest a few hundred thousand dollars, and if he is a good guy, you can earn a princely 0.35% over the next year. And that’s taxable. But if you want to pay your child’s tuition in advance at the College, you can pay for up to four years at today’s rate, and avoid all annual increases. Had you done that with your tuition payments to the College when your ‘15 showed up in Hanover in the fall of 2011, you’d have made close to 4.0% per annum on your investment (though the annual growth of tuition is declining). Tax-free.

Tuition Growth.jpg

Why would the College be so generous to wealthy parents? Actually, the motivation isn’t generosity at all. Just the opposite. The administration is happy for forgo annual tuition increases for people who can throw down big money; once the endowment folks have the cash, they can invest it and earn a higher return than what the College is giving up.

Look at the gross returns the endowment’s money managers have made over recent years (Warning: Past Performance Is Not an Indication of Future Results). Over the past three years, the College would have given up 2.9%-5.9% tuition increases to people who paid early, but the endowment’s managers would have earned about 12% on that money:

Endowment Returns.jpg

The College’s Tuition Prepayment Plan (TPP) is a pretty good deal for everyone involved, including people on financial aid. Remember that those big endowment returns finance scholarships, too.

Addendum: A parent writes in:

Thanks for the post this morning on the tuition prepayment plan. My daughter is a student at the College and my son recently graduated, and I’ve never heard of the program. Either I’ve been under a rock or it’s not been well-publicized. In any case, I called the Controller’s office not too long ago and the folks there said that the program is under review and the College is not sure it will be continued. They have no information on when a decision will be made.

I find it curious that the College is reviewing the program, even as Phil has announced that tuition increases are slowing down. With any luck, the endowment will keep growing, and if tuition does not rise as much as in past years, the economics of a tuition pre-payment plan work even better for Dartmouth.

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