Washington and Lee University hasn’t met its endowment return goals for the past three years. Meanwhile, the school’s estimated cost of attendance will be $95,500 for the 2025-26 academic year, nearly a 5% increase from this year.

Endowments work like retirement funds. Universities spend a small fraction, typically 4 or 5%, of their endowment every year on expenses. Ideally, they make the money back through an annual return on their investments.

W&L sets a return goal of 7.5% annually, according to university financial statements. With that target, it can spend its 4% per year and still grow the endowment to keep pace with inflation.

But for the third year in a row, W&L failed to meet that target.

In the same amount of time, tuition increased by 10.3%. Next year’s tuition change will send the cost of attendance even higher.

Tuition, which makes up the bulk of the student bill, will increase by 4.6% from $66,800 this year to $70,100 next year. Other mandatory expenses—room, board, and activities fee—will see similar 3-5% increases.

Next year’s price increase is the latest in a series of tuition hikes that have seen W&L’s cost of attendance increase by 35% over the last seven years, according to the university’s website. Meanwhile, inflation has increased prices by only 28% in that time frame, according to data from the

Bureau of Labor Statistics. W&L’s  standard cost of attendance per student was about $70,500 in 2018, according to the university’s website.

“It is important to recognize that no student pays the full cost of W&L’s education, services and activities,” said Treasurer and Vice President for Finance and Administration Steve McAllister in an emailed statement to the Phi. Last year, expenses per student were subsidized by $21,000 using the endowment and gifts to the university, McAllister said.

W&L gives financial aid on top of that to help students with burdensome costs. 57% of students in the first-year class received a financial aid award, which averaged $64,000, according to the university’s website. Average aid will likely increase with the university’s decision to become need-blind in admissions, a decision it announced in October, according to previous reporting by the Phi.

But at the same time that the university is bringing more money in through tuition, it’s making poor returns on its existing investments.

The university endowment returned a mere 5.3% in its most recent fiscal year, according to its most recent financial statements. Over that span, the S&P 500, an index of the 500 leading US companies, returned 23%—four times as much as the endowment.

While that S&P return sounds appealing, the university shouldn’t be completely exposed to the stock market, said Scott Hoover, a W&L finance professor.

A heavy investment in the stock market would carry significantly more risk, Hoover said. In 2008, for example, the stock market lost 38% of its value.

“That could be absolutely devastating to even a school like W&L,” Hoover said.

Instead, W&L sets a long-term 7.5% target for the annual return on its endowment. Its diverse portfolio includes public and private equity, fixed income and real estate, according to its financial statements.

“It’s a thoughtfully chosen target that’s been in place for at least 20 years or so,” Hoover said.

But the 2023-24 fiscal year marked the third consecutive year W&L failed to meet that target. The endowment had a 1.8% return from 2022-23 and a -6.6% return the year prior, according to W&L financial statements.

The university is falling short of its target in the longer term, too, averaging a 7.1% return over the last five years and a 6.5% return over the last ten years, according to W&L financial statements. A 36% return in the year after the pandemic is the only time since 2018 the university has surpassed the 7.5% benchmark.

The returns have forced administrators to cut departmental budgets and limit raises, according to previous reporting from the Phi.

“Many of our peers are facing the same pressures,” McAllister said in the emailed statement. “Low returns impede the amount of the payout that can be distributed in a fiduciarily responsible way.”

The average annual return at the Top 25 liberal arts colleges over the last three fiscal years was just 2.2%, McAllister said. But W&L falls short of that mean, too, returning close to zero in that span. In fact, many of the university’s peer institutions are well outperforming W&L in the short term. Amherst, Bowdoin, Williams and Carleton colleges each returned between 10 and 11% last fiscal year, nearly twice W&L’s return, according to their websites.

Many top colleges manage their endowments internally, with investments selected by a chief investment officer or an investments committee, according to their websites. While W&L does have an investment committee, over half of the investments on the university’s balance sheet are managed by an external firm,  Makena Capital Management, LLC, a firm based on the west coast and run by several Stanford alumni.

Hoover was a faculty representative to the Board of Trustees in 2008 when Makena was hired as W&L’s portfolio manager. He said that W&L had been searching for an external manager because many members of the investment committee balanced the portfolio with other responsibilities.

“It made sense to say we need somebody on this, somebody who’s getting up every morning thinking about us,” Hoover said.

The move to Makena was a “solution that provided a greater level of daily oversight and a more holistic approach to the entire portfolio,” McAllister said in his email.

The $878 million currently managed by Makena is down from over a billion dollars in 2021. It’s unclear whether that decline is because of withdrawals from the endowment, which McAllister said W&L uses to finance its expenses, or a poor return on investments. Makena Capital did not respond to several requests for comment.

As for the coming year, the university has been adjusting its strategy, McAllister said.

The national landscape is looking different every day, with Republicans considering a major expansion of taxes on college endowments, according to Politico. W&L, which has an endowment of $900,000 per student, could be taxed at a 7% rate, according to proposed legislation.

Aside from the federal government’s ongoing feud with higher education, markets have seen high volatility. The S&P 500 took a 20% downturn between February and April before rebounding last month. It is within 4% of an all-time high as of May 15.

“Due to the current volatile nature of markets and uncertain national landscape for higher education, we have been deliberately conservative regarding the return we will achieve in the current year,” McAllister said.