Digging Deep into University Pockets

Only a decade ago, billion-dollar endowments were limited to this country’s elite universities. Today, the number of universities with such endowments has increased from 17 to 62, and in a few years the number could be over 100.

Growing endowments led politicians to consider requiring these private universities to spend a specified percent of their yearly endowments if they wanted to maintain their tax-free status. However, government intervention is unnecessary because universities are already taking steps to meet student aid, and the government has no place in regulating the spending of private institutions with privately donated and already partially controlled endowment funds.

At the forefront of this proposed policy is Chuck Grassley, a Republican senator from Iowa, who calls for “federal and state lawmakers to address out-of-control tuition increases.” Instead of using the government’s money to fill the gap between financial aid and tuition costs, Grassley suggests that universities’ endowments do the job instead.

Lynne Munson, an adjunct fellow of the Center for College Affordability and Productivity, argues the case for this governmental step towards college affordability. She says that universities maintain spending patterns established in a time when their endowments were much smaller and they could not afford to spend more. On average, universities spend only 4.6% of their endowments yearly, which is how these universities retain vast resources that can grow over 12% each year. Mason concludes, “What the data shows is that endowment wealth is everywhere – except in the hands of the students who need it today.”

Dana Mead, chair of the MIT Corporation, and Jeremy Jacobs, chair of the Council of the University at Buffalo, SUNY, argue that universities already spend as much of their endowments as they can. Speaking from their experience as “chairmen of the boards at two of our nation’s most-important research universities … [and] as taxpayers, businesspeople, parents, and citizens,” they claim to “strongly support the goals of making college affordable, aiding low-income students and conducting research.”

Why don’t they spend more? Mead and Jacobs point out that often they cannot spend more due to legal and moral obligations to honor donors and support the future of the endowments. The growth of endowment funds is largely due to sound financial management. And, they conclude, “forcing endowments to spend more quickly might help in the short run, but it’s a recipe for long-term weakening of a major national asset. Too often we see the government ignore the long-term needs to meet short-term goals. It shouldn’t force us to do the same.”

Morgan Olsen, executive vice president and treasurer of Purdue University, articulates Mead’s and Jacobs’ point, saying, “We try to spend as much as we can while preserving the purchasing power of the endowment over time… What goes up can come down.”

Alec Brandon, of the University of Chicago, authors a column that reinforces this view, pointing out that endowments are not just about financial aid, but also about long-term stability. While it is true that currently large endowments yield returns around 10%, this could easily change with the economic market. Endowments in the 1970s were shrinking – Yale’s endowment decreased 45%, resulting in a huge spending cut that decreased availability of financial aid.

Seventy-five percent of Vanderbilt University’s reported $3.5 billion endowment is reserved for specific uses, as designated by donors. Vanderbilt spokesman Mike Schoenfeld told The Tennessean, “There are very direct and very specific designations from donors about the usage of a vast majority of the endowment fund.” Still, Vanderbilt is one of the few universities that is need-blind and meets 100% of demonstrated financial need.

With such restrictions placed on endowments by donors, an additional government restriction would not benefit Vanderbilt, other institutions, or future students in the long run. Mead and Jacobs urge the government to consider the long-run implications of forced endowment spending.

Brandon refers to the University of Oxford and the University of Cambridge, once the “pinnacle of higher education.” At one time they had “the most money, the best professors, and the top students in the world.” But the high tuition rates caused the British government to step in and regulate the cost, resulting in artificially low tuition rates. The governmental control of their finances kept them from being able to compete internationally with institutions in America and those growing up in Asia. A governmental restriction of endowments would pull American universities from international competition eventually as well. Brandon quotes David Palfreyman of New College, Oxford, who points out that Oxford and Cambridge may go from being “over-performing to overrated.”

But government intervention is no longer necessary. Colleges are well aware of student need and their ability to help, and with the threat of government intervention, have fought to meet the need without unnecessary regulation.

After three years of planning, in December 2007, Harvard announced a new financial aid policy that will make Harvard more affordable for all level of income families. The initiative has three steps: more grant aid, the elimination of student loans, and removing home equity from aid consideration. In the 2007-08 school year, Harvard spent more than $98 million on financial aid of its $35 billion.

Across the board other schools such as Williams College, Amherst College, Emory University, Wesleyan University, Stanford University, and many others are seeking to cut debt and ease financial strain through measures their institution can support.

While politicians and an adjunct fellow were allowed to testify at the hearing for the proposal of government-mandated spending for colleges and universities, higher education officials were not allowed to speak. They submitted their own testimonies later, but as Justin Pope, an Associated Press education writer, points out: “The underlying issue is that the proposal would represent a major encroachment by Washington into university affairs.”

What right does the government have to control the way a private college teaches or spends its money? A private institution has the power and autonomy to choose how it will teach or spend its money, just as the students make the private, individual choice to submit to that teaching or accept that tuition price. Terry Hartle, senior vice president of the American Council on Education representing colleges and universities in Washington, states: "We don't think as a general matter the federal government ought to be telling private philanthropic organizations, that have been around in some cases since before the federal government, how to spend their money."