Don’t Table Endowments

Speaking at a Congressional roundtable on college endowment spending on Monday, college leaders and lobbyists offered a multitude of reasons why requiring institutions of higher education to spend a minimum amount of their endowments each year is bad policy and fundamentally unworkable. Among their arguments, they claim that a mandatory payout of endowment funds would be overly burdensome on institutions; would harm future generations of students on their campuses by depleting present resources; and would serve no public good.

We respectfully disagree. At Higher Ed Watch, we have offered a proposal for a mandatory payout that renders most of these objections moot. Our plan would require the wealthiest colleges to spend a specific percentage of the market value of their endowment funds each year, with the difference between their current spending rate and the new threshold going to concrete, measurable projects aimed at improving socioeconomic diversity among students and applicants.

Co-hosted by Sen. Charles Grassley (R-Iowa), the ranking member of the Senate Finance Committee, and Rep. Peter Welch (D-Vt.), who moderated the discussion, yesterday’s event featured experts on college endowment practices, higher education leaders and lobbyists, and watchdog groups [Disclosure: the author of this post participated in the roundtable.] Ostensibly, the event’s three major goals were to (1) provide a better understanding of the link between college costs and tuition, (2) define and classify university endowments, and (3) debate whether institutional endowments should be subject to a mandatory annual payout. Ultimately, the discussion largely focused on reasons that colleges believe requiring a minimum spending rate would be inadvisable.

Let’s take a closer look at the arguments advanced by participants yesterday and show how our proposal addresses them.

Argument: A mandatory spending rate is too burdensome for colleges with small endowments

Most colleges do not have large endowments. According to Molly Broad, the president of the American Council of Education, the vast majority of postsecondary endowment funds (about 70 percent) are controlled by 75 universities. The rest is divvied up among the thousands of other colleges nationwide.

It is true that many schools with smaller endowments would be unable to meet an annual spending requirement. That’s why Higher Ed Watch‘s proposal would leave these institutions alone. Our plan would require a mandatory payout level only from colleges with endowments over $500 million or some other agreed upon metric.

The 75 schools or so that would be affected represent a fraction of national postsecondary enrollment, but they are also among the premier colleges and universities in the world. As a result of their reputation, these institutions confer substantial benefits to their graduates. We believe that colleges should be doing more to ensure that those benefits are accessible to students across all socioeconomic brackets.

Unfortunately, that largely doesn’t appear to be the case. Apart from isolated shining examples, such as Amherst and Smith colleges, where 20 percent or more of the student body is Pell eligible, America’s wealthiest schools enroll a small and apparently decreasing number of low-income students. According to an analysis published this May by the Chronicle of Higher Education, only 13.1 percent of students at the 75 wealthiest private institutions in the 2006-07 school year received Pell Grants. Moreover, the Chronicle found that the number of Pell Grant recipients at these institutions actually decreased from 14.3 percent in the 2004-05 school year.

Argument: Forced endowment spending on tuition reduction wouldn’t serve the public good

College leaders were very clear at Monday’s roundtable that there is at best a tenuous link between endowment spending and a further lowering of tuition because institutions already use endowment funds to subsidize tuition and fees. They argued that mandating higher spending rates would lead to nothing more than a small decrease in tuition — at best.

But reducing college prices is not a cure-all for college access problems. Ironically, the reduction in the proportion of Pell Grant recipients at wealthy schools occurred after several took steps to substantially reduce their tuition burden for financially needy applicants. This suggests that colleges need to do more than lower tuition costs to improve socioeconomic diversity on campus.

This is where mandating a minimum payout rate for endowments could be useful. Rather than just requiring colleges to spend more of their endowments on the nebulous, seemingly catch-all category of “student aid,” colleges under our plan would be required to use additional funds to take proactive measures to attract more low-and moderate income students to their campuses, and help them succeed and graduate once there.

With such a mandate, colleges would not be able to use the increased endowment spending to supplant, rather than supplement, existing student aid dollars, or use them in a fungible way to finance extravagant capitol projects, such as dormitory amenities or new fitness centers for athletes.

Instead, the newly tapped endowment money could go to projects such as:

• Centers of Excellence for Low-Income Student Success
  Under the recently-passed Higher Education Act reauthorization legislation, colleges can apply for grants to create centers of excellence for veteran students. These centers are to consist of full-time staff members whose job will be to coordinate all aspects of veteran student life, running the gamut from academic and career advising, access and persistence monitoring, outreach, housing support, and tutoring assistance. We would like to see colleges use the additional endowment funds to create similar centers for low- and moderate-income students.

• Improved High School Outreach
  In Creating a Class: College Admissions and the Education of Elites (Harvard University Press, 2007), Mitchell Stevens, an associate professor of educational sociology at New York University, documents the mutually beneficial nature of close relationships between admissions officers at an elite New England liberal arts college and guidance counselors at prestigious public and private high schools. Admissions officials who are familiar with specific schools and counselors end up devoting more time to these schools, which aids their efforts to locate talented students. Under our plan, colleges could use additional endowment funds to buttress their efforts to build stronger relationships with officials at high schools that predominantly serve lower-income students.

• Local Outreach
  Increased endowment spending on preparing low-income students for a college education need not solely target individuals guaranteed to attend one of these wealthy institutions. Many colleges with large endowments are located in economically depressed cities and counties where an influx of money could have substantial effects on improving the educational outcomes of students in local school districts. For example, my alma mater Brown University, promised in February of 2007 to create a $10 million endowment for the Providence School District. This fund could be an important source of support for a district where 38 percent of its students are impoverished and just 28 percent of its fourth grade students scored proficient or higher on state mathematics tests.

Argument: Spending too much from endowments now would harm future generations

Many wealthy colleges claim that spending more endowment funds today would be unfair to future classes of students because it would deplete available resources — a concept known as intergenerational equity. There are two problems with this argument. First, most colleges already are spending over 4 percent of their endowment funds each year, meaning they would likely be forced to contribute only a few tenths of a percentage point more. Surely this is not enough to drain what are extremely well-managed funds.

Second, the schools are adopting a notion of intergenerational equity that is far too narrow. Rather than thinking solely about the potential harm to future classes of students on a given campus, colleges should be thinking about the societal implications of continuing our current policies. According to the Advisory Committee on Student Financial Assistance, an estimated 170,000 otherwise qualified low- and moderate-income students do not attend college each year. These individuals are put at a significant disadvantage in the workplace and are likely to generate much less income over their lifetimes. Failing to attend college also has implications for individuals’ children. The National Center for Education Statistics found that students whose parents had a bachelor’s degree or higher enrolled in college at a rate 22 percentage points higher than students whose parents had no more than a high school diploma. Enrolling a low-income student today increases both their expected lifetime earnings and the likelihood that their children will go to college, having a positive impact on the college access of future generations.

Obviously the endowment issue is far more complex than just requiring a blanket payout rate for all institutions. But for the wealthiest colleges there should be fundamental questions raised about whether their lack of socioeconomic diversity is hindering them from fulfilling their greater educational mission. This also has implications for taxpayers, who forgo the billions of dollars the government loses by not taxing donations to, and earnings from, endowments. For these reasons, we believe that a mandatory endowment payout rate for higher education is an issue worthy of further debate and negotiation.

(Click here for more materials from the roundtable and here for comments prepared by this post’s author for the roundtable.)

UPDATE: Video of the roundtable is now available here.