Turning up the Heat on Endowments

As the old adage goes, you reap what you sow. For many years colleges and university endowments, which receive very advantageous government tax breaks, have grown at extraordinary rates. Now, two high-powered senators are starting to ask questions about just what these wealthy institutions have been doing with their funds. While we applaud Congress efforts, we are afraid that too much of a focus by the Senators on tuition, rather than low-income student access, could lead to more improperly tilted financial aid policies and an increasingly bifurcated educational system.

What prompted this latest attention to school wealth was the release of the 2007 Endowment Study by the National Association of College and University Business Officers. Going beyond the massive returns already disclosed by individual colleges, the study found that schools with endowments over $1 billion earned an incredible 21.3 percent rate of return for the 2007 fiscal year, only slightly more than the 19.3 percent return for colleges with endowments between $500 million and $1 billion. Even in aggregate, the 785 schools surveyed reported an average return of 17.2 percent.

Despite the massive gains, the study also found that spending from endowments did not keep pace schools with endowments over $500 million had a spending rate of just 4.4 percent, while the sample as a whole averaged just 4.6 percent. Both numbers are beneath the previous years figure and fall well beneath the 5 percent spending rate standard required of other private tax-exempt foundations.Not to mention the 6 percent figure that used to be required of other private tax-exempt foundations prior to 1979.

The studys findings did not take long to spur Congressional action. That same week, Senators Max Baucus (D-MT) and Chuck Grassley (R-IA), the Chair and Ranking member, respectively, of the Senate Finance Committee, sent a letter to the 136 colleges with endowments over $500 million. Among a litany of requests, the Senators asked the colleges to provide data on stated versus actual tuition rates, how endowment resources are used for financial aid, what kind of low-income recruitment efforts are taking place at the university, and how much of endowments are restricted. Most telling, though, was the Senators request on the endowment spending rate, which included the line, “If either the actual and/or targeted payout is below 5%, please explain how this meets the needs of the current student body.”

As strong supporters of a 5 percent spending requirement, we at Higher Ed Watch are heartened by the Baucus/Grassley letter. We are also glad to see the Finance Committee pushing forward on the issue after bringing it up in September. That being said, we are concerned that the Senators may use the right means for the wrong ends.

In the press release accompanying their letter, Baucus and Grassley couch their requests in terms of rising tuition and how endowments need to be used to help ease the cost of college. This is certainly an important goal, but it suggest an imbalanced focus on affordability over access. Both are important.

Solely requiring endowment spending for the sake of spending opens the door to policies mimicking the recent aid expansions to well-off families by Harvard and Yale. As we noted two weeks ago, these policies benefit not only a small group of applicants, and generally not the neediest. Even more troubling is the fact that Yales plan, albeit flawed, appears to have satisfied Grassley. He called the upper-income aid expansion “an example for well-funded schools to do the same.” A willingness to be sated by policies that use spending on wealthy students could set an unwelcome precedent. Instead, it would be better if other colleges with large-endowments followed older policies that eliminated contributions for families below a certain income.

The Senators, meanwhile, should note a recent study in the Journal of Blacks in Higher Education. Looking at Pell Grants, an imperfect but useful measure of low-income students, the study found that the number of Pell recipients actually dropped at many prestigious institutions from 2004 to 2006 a disconcerting trend given their already low numbers. Stanford, for example, saw a decline in its percentage of students receiving Pell Grants from 14.2 percent to 12.6 percent, while Yale dropped from 10.5 percent to 9.4 percent. As Tom Mortenson, a scholar who conducted his own study of low-income access told the Hartford Courant, “Yale seems to think its mission is to create Presidents of the United States.”

The best solution for Grassley and Baucus would be to shift their focus away from the generic catch-all phrase “tuition reduction,” and instead emphasize the need for schools to take more pro-active, demonstrable measures to “prepare, recruit, enroll, and retain low-income students.” This is a more clear-cut goal that builds and expands on existing aid policies that are targeted to the population most sensitive to the price of higher education. It also would discourage schools from simply opening up their coffers to the richest students.

Society forgoes revenue to give colleges the tax breaks that helped boost their endowments to massive sizes. It’s time that those funds be put toward those students that will benefit from them the most.