Open the Lockbox

In June, we floated a proposal that would require the wealthiest colleges and universities to spend a minimum amount of their endowments to help increase enrollment of low-income students. After taking a closer look at just how inadequately the most affluent private colleges are serving these students, we are even more convinced of the need for such a policy.

According to the U.S. Census, 61% of households in 2005 earned under $60,000. But on average, only 19% of traditional-age students at the 38 colleges with endowments over $1 billion come from families with incomes under $60,000 a year.

The numbers are even bleaker for Pell Grant recipients, who usually come from households making under $40,000. On average only 12% of students at private colleges with billion dollar plus endowments received Pell Grants for the 2004-2005 school year. At Harvard, only 6% of all students are Pell Grant recipients. As the numbers show, higher education is becoming increasingly stratified: the richest schools take in the wealthiest applicants while poorer students get shunted off elsewhere, if they manage to go to college at all.

Congress is currently considering legislation that would make college more accessible for low-income students by significantly raising the maximum Pell Grant. While we strongly support these efforts, we fear that without a slowdown in tuition growth and increased institutional aid, Pell Grant increases will have only a limited impact at elite colleges and universities.

If the leaders of the nation's most prestigious colleges are sincere about their oft-stated desire to provide all students with an equal opportunity for success, then they should start taking a more active role in enhancing the socioeconomic diversity of their campuses. That's why we believe that the richest private colleges those with endowments over $1 billion should be devoting a minimum share of their own endowment-generated funds to helping target, recruit, and retain low-income students.

We imagine college officials will rail against this proposal, claiming that most institutions of higher education operate on shoestring budgets and that increased spending of endowment funds would end endowments. But consider the facts. A study by the National Association of College and University Business Officers (NACUBO) found that the average return for endowments over $1 billion was 15.2% last year and 15.3% per year over the last three years well above the S&P 500 index. With these levels of returns, a $1 billion endowment earns an additional $157 million per year tax free.

Not only are endowments generating high returns, but as a recent column in Inside Higher Ed pointed out, the gains are remaining parked in institutional coffers. Unlike other types of nonprofit foundations and charities, which are required by law to spend 5% of the value of their endowments each year, colleges have no legal obligation to pay a cent out of their stockpiled money. Not surprisingly, the NACUBO study found that colleges annually spend on average only 4.2% of their endowments value.

In our view, holding colleges to the same standards as other nonprofit foundations would mean a college with a $1 billion endowment would have to spend an additional $8 million of institutional funds on low-income students. If that same college was forced to meet the average nonprofit foundations actual spending rate of 7% of endowment funds, an additional $20 million would become available for low-income students. Cumulatively, if all 38 private colleges with endowments larger $1 billion were required by law to increase their endowment spending rates to 5% of total funds, an additional $1.35 billion in support would be available to low-income students. A 7% requirement would free up $4.72 billion for low-income students all at no additional cost to taxpayers. Under our proposal, institutions would have to dedicate increased endowment resources to recruit and retain low-income students, rather than just padding operating expenses.

If the most elite colleges are serious about increasing their enrollment of low-income students, they need to stop hoarding their wealth.

[Editor's Correction: The spending numbers cited in this post refer only to the 38 private colleges with endowments over $1 billion. There are also a number of public universities with large endowments that were not considered.]