|Inside Higher Ed
July 26, 2007
By Lynne Munson
Robbing the Rich to Give to the Richest
Sen. Edward M. Kennedy, fresh from an investigation of the student loan industry, is out with a plan he says will "help reverse the crisis in college affordability." Kennedy’s Robin Hood approach takes $18 billion from lenders and applies it to reducing loan repayment costs for students, among other purposes.
The student loan business is a lucrative one. But the senator is going after the wrong folks if he’s trying to rein in the biggest "fat cats" in academe. That mantle should rest on the shoulders of colleges and universities themselves. Legislators setting policy with regard to higher education should realize that colleges and universities are our nation’s richest -- and possibly most miserly -- "nonprofits."
Colleges and universities are sitting on a fortune in tax-free funds, and sharing almost none of it. Higher education endowment assets alone total over $340 billion. Sixty-two institutions boast endowments over $1 billion. Harvard and Yale top the list with endowments so massive, $28 billion and $18 billion respectively, that they exceed the general operating funds for the states in which they reside. It's not just elite private institutions that do this; four public universities have endowments that rank among the nation’s top 10. The University of Texas’ $13 billion endowment is the fourth largest nationwide, vastly overshadowing most of the Ivy League.
These endowments tower over their peers throughout the nonprofit world. The Metropolitan Museum of Art is America’s wealthiest museum. But the Met’s $2 billion endowment is bested by no less than 26 academic institutions, including the University of Minnesota, Washington University in St. Louis, and Emory. Indeed, the total worth of the top 25 college and university endowments is $11 billion greater than the combined assets of their equivalently ranked private foundations -- including Gates, Ford and Rockefeller.
Higher education endowments also are growing much faster than private foundations. The value of college and university endowments skyrocketed 17.7 percent last year, while private foundation assets increased 7.8 percent. Just 3.3 percent of the increase in academic endowments is attributable to new gifts. Most of the gain is a result of stingy, outdated endowment payout policies that retain and perpetually re-invest massive sums. This widespread practice results in a hoarding of tax-free funds.
A recent survey of 765 colleges and universities found they are spending 4.2 percent of their endowments’ value each year. Meanwhile, private foundations -- which are legally required to spend at least 5 percent of their value annually -- average 7 percent spending.
Higher education endowments differ from private foundations in one particularly important respect. Private foundations exist to give their money to others, while college and university endowments support just one charity -- their school. But isn’t being your own sole beneficiary reason to spend more, not less? Particularly when a substantial area of spending -- financial aid grants to current students -- targets precisely the people you expect will be your future donors?
Paradoxically, it is precisely the meager financial aid outlays of endowment-rich colleges and universities that make the true miserliness of low payout practices most apparent. Stanford University spends $76 million on undergraduate financial aid, a sum that sounds generous but amounts to a mere 0.5 percent of the value of its endowment. The university spends just 4 percent of its $14 billion endowment toward operating expenses. If the 5 percent payout rule required Stanford to spend another 1 percent of its endowment, and that money was directed toward financial aid, students would enjoy $211 million in additional support. That is precisely the cost of letting all 6,600 Stanford undergraduates attend tuition-free.
The University of Texas’ nine campuses enroll 147,576 undergraduates who each pay on average $5,903 in tuition. All of U.T.’s undergraduates could attend school tuition-free if the system spent half the amount the university’s endowment grew just last year.
Of course just because a college can afford to offer education tuition-free doesn’t mean it should. Giving a free ride to students who can afford to pay obviously would cut into the bottom line in other ways. Also, education is a real service for which people should pay. And a higher quality education should command a steeper price.
But college and university endowment spending practices should reflect the public responsibility that adjoins tax-free status. When people donate to a school they get a tax break because their donation is supposed to serve the public. When those untaxed funds sit unused, piling up for decades, taxpayers are making a sacrifice and getting nothing in return.
College and university endowments currently are exempt from the 5 percent annual payout requirement. Institutions of higher education aren’t even required to publicly report endowment payout rates or the purposes for which funds are spent. And the only organization that collects that information, the National Association of College and University Business Officers, does not make it public, except on an aggregate basis. Congress should require payout rates and specific expenditures for individual institutions to be made public each year. And if this "sunshine" fails to drive up endowment spending, a minimum payout requirement should be established.
And 5 percent should be considered just a starting point. College and university endowments exist to support current operations. But if that only requires a mere 4 percent draw, clearly there is ample room to use additional endowment funds for purposes that serve the public directly. For example, why not take some of the burden off students, families and taxpayers by providing more financial aid to needy students? After all, why should taxpayers be subsidizing an ever-burgeoning number of student loans while schools can afford to provide more scholarships?
For too long the government response to skyrocketing tuition has been to increase the size and number of student loans. Now the plan is to make loan repayment easier and increase grant aid again. But making it possible for students and parents to go more deeply into debt only encourages endowment hoarding and runaway tuition. It is time for legislators to come up with a smarter strategy for addressing college affordability -- one that will pressure colleges and universities to better serve students, families, and taxpayers. And getting schools to stop hoarding billions in tax-free funds would be a good first step.
The high cost of education has consequences. When asked to name an expense that is beyond their reach, people cite "paying for college" more than buying a home, retirement, or anything else. The intimidating effect of high tuition is the largest "access" problem in American higher education. If colleges and universities truly want to open their doors to all, they will begin by sharing their riches.
Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity, served as deputy chairman of the National Endowment for the Humanities from 2001-5. She is at work on a book on endowment hoarding.