Rich Schools Should Use Endowments More

Lynne Munson writing in Inside Higher Ed, thinks that Congress should force colleges to spend a minimum amount of their endowment on a yearly basis, a requirement that applies to other charitable trusts, but not to college endowments:

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 Most of the gain is a result of stingy, outdated endowment payout policies that retain and perpetually re-invest massive sums.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?

This last item is of particular note to me. I graduated from the University of Maryland as did my wife. Within two years of graduating, the Alumni development office (read fundraising arm) of the school was calling us for money. Before I even graduated from law school, the school was aksing for money.

I fully intend to give back in both time and money to my alma maters, and in fact already have. But that audacity of these schools, whose endowments are hefty to say the least, but nowhere near the levels of Harvard and Yale, to ask for money when they themselves are so stingy with money is almost laughable.

Munson suggests treating college endowments in the same manner as private charities and insist upon publicly disclosed and enforced payments from the endowment for tuition.

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.

If the typical endowments spends 4 percent on operational costs of the school, an additional 1 percent spent on tuition assistance, even divided amoung need based and merit based scholarships will go a long way to reducing college costs. Just to give you an idea, the endowment at Harvard is $28 billion, one percent spending on tuition and fees would amount to $280 million dollars in college aid.

Munson is not suggesting a tuition free schooling for everyone, but if the schools can help by spending their endowments a little there will be two effects. One, the schools are less likely to keep increasing tuition which would then cause them to spend more from the endowment. Two, financial support for college means that fewer loans are needed and with less debt coming out of college, that pesky phone call two years after you graduate becomes much easier to bear and respond to.