The University’s $7.1-billion endowment ranks eighth among all colleges and universities nationwide, according to an annual report released Thursday.

The report, released by the National Association of College and University Business Officers, showed that 2007 was a good year for most college endowments.

The national average rate of return was 17.2 percent, but the University did even better, posting a 25.4-percent return on its investments. The return was the largest of any school that finished in the list’s top 10.

With endowments swelling at schools across the country, rising tuition costs have led many to question how the benefits are distributed and why they don’t lessen the cost of attending college.

One reason is that most of the money colleges earn on investments cannot be spent. Universities usually spend about 5 percent of their investment returns, while the rest is reinvested as a buffer against inflation. In addition, donors often earmark funds for specific objectives, like professorships, scholarships or building projects, meaning the money can’t be spent for other uses.

Senators Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa), both members of the U.S. Senate Committee on Finance, recently sent letters with questionnaires to colleges with endowments larger than $500 million asking them for information about the colleges’ payout policies – especially how it is used to fund student aid.

Because endowments receive generous tax breaks, the senators said they would like to see universities use endowment money to provide affordable education to low-income families.

“Tuition has gone up, college presidents’ salaries have gone up, and endowments continue to go up and up. We need to start seeing tuition relief for families go up just as fast,” Grassley said in a press release by the United States Senate Committee on Finance.

Timothy Slottow, the University’s chief financial officer, said the University plans to respond to the questionnaire but hasn’t received it yet.

Slottow attributed the University’s 2007 endowment gains to both University strategies and the economy.

“The 25 percent return is one of the highest ever, and it occurred largely as a result of prudent investment policies and last year’s surging market,” Slottow said.

Endowments have become an increasingly popular way of raising revenue among colleges.

Slottow said the University’s return has acted as a cushion in times of market instability, like the nation’s recession in 2001 and 2002.

“In the down years, we have to draw on funds conserved from the more successful years,” he said.

Former University President James Duderstadt said in an e-mail interview that endowments are especially important to the University because of its lack of state government support. The state of Michigan has cut funding to higher education more than any other state over the past 10 years, according to Illinois State University’s Grapevine project, which collects annual data on state appropriations.

“The state of Michigan needs (and deserves) a university much better than it is willing to pay for,” Duderstadt said. “Hence UM must turn to its alumni and friends to provide the support no longer provided by the state.”

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