July 26, 2007

Robbing the Rich to Give to the Richest

Sen. Edward M. Kennedy, fresh from an investigation of the student loan industry, is out with a plan he says will “help reverse the crisis in college affordability.” Kennedy’s Robin Hood approach takes $18 billion from lenders and applies it to reducing loan repayment costs for students, among other purposes.

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The student loan business is a lucrative one. But the senator is going after the wrong folks if he’s trying to rein in the biggest “fat cats” in academe. That mantle should rest on the shoulders of colleges and universities themselves. Legislators setting policy with regard to higher education should realize that colleges and universities are our nation’s richest — and possibly most miserly — “nonprofits.”

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 Most of the gain is a result of stingy, outdated endowment payout policies that retain and perpetually re-invest massive sums.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

Paradoxically, it is precisely the meager financial aid outlays of endowment-rich colleges and universities that make the true miserliness of low payout practices most apparent. Stanford University spends $76 million on undergraduate financial aid, a sum that sounds generous but amounts to a mere 0.5 percent of the value of its endowment. The university spends just 4 percent of its $14 billion endowment toward operating expenses. If the 5 percent payout rule required Stanford to spend another 1 percent of its endowment, and that money was directed toward financial aid, students would enjoy $211 million in additional support. That is precisely the cost of letting all 6,600 Stanford undergraduates attend tuition-free.

The University of Texas’ nine campuses enroll 147,576 undergraduates who each pay on average $5,903 in tuition. All of U.T.’s undergraduates could attend school tuition-free if the system spent half the amount the university’s endowment grew just last year.

Of course just because a college can afford to offer education tuition-free doesn’t mean it should. Giving a free ride to students who can afford to pay obviously would cut into the bottom line in other ways. Also, education is a real service for which people should pay. And a higher quality education should command a steeper price.

But college and university endowment spending practices should reflect the public responsibility that adjoins tax-free status. When people donate to a school they get a tax break because their donation is supposed to serve the public. When those untaxed funds sit unused, piling up for decades, taxpayers are making a sacrifice and getting nothing in return.

College and university endowments currently are exempt from the 5 percent annual payout requirement. Institutions of higher education aren’t even required to publicly report endowment payout rates or the purposes for which funds are spent. And the only organization that collects that information, the National Association of College and University Business Officers, does not make it public, except on an aggregate basis. Congress should require payout rates and specific expenditures for individual institutions to be made public each year. And if this “sunshine” fails to drive up endowment spending, a minimum payout requirement should be established.

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.

Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity, served as deputy chairman of the National Endowment for the Humanities from 2001-5. She is at work on a book on endowment hoarding.

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Comments

Why not just lower tuition?

Hmm. Why go through the roundabout process of giving scholarships to defray tuition costs? That’s just taking money out of the left pocket to put it back into the right (minus a lot of salary and operating costs to administer the process). If colleges are going to use more of the return on their endowments to assist students, why not simply lower tuitions? When Stanford first opened in the 1890s, it was free (gasp!).

Cranky Old Prof, at 7:40 am EDT on July 26, 2007

the 80/20 rule applies

I can hear the howls of protest from schools around the country: “Our endowment is zip!” “Our costs are through the roof!” “Our legislature hasn’t given us squat!” “Our infrastructure is shot!”

All true, no doubt about it. The majority of schools in the US are living hand to mouth. There are a hundred reasons why this is true, and legislation, no matter how good, won’t be able to address the fiscal health of every single college.

Ms. Munson demonstrates that the tip of the academic iceberg accounts for the lion’s share of dollars donated to education. And Wick Sloane recently pointed out that billions are donated every year, but predominantly to a handful of already-wealthy institutions.

In the US, 16% of GDP is currently devoted to health care. In the aggregate, this is plenty of money to provide top-notch care to the entire US population. Nonetheless, our system is a mess, with gaping holes in availability for vast numbers of people. Similarly, at the postsecondary level, U.S. expenditures per student were $24,074, higher than the OECD average of $11,254. I couldn’t find comparable GDP percentages for postsec education, but at this rate of spending, you would expect us, again in the aggregate, to have all the money we need to educate all comers. Instead, we have rampant inequality of financial outcomes for similar educational experiences, at both the level of individuals, and institutions.

Most of this is not the fault of the wealthy upper crust: it is the inevitable result of the miracle of compounding interest. Now, however, really is time to level the playing field. Confiscatory impulses must be avoided. The money is out there, but must be allocated more efficiently. There are a lot of bright boys and girls in every sector involved in this issue. Is greed among schools and lenders (and profligate spending by education consumers) the only obstacle to overcome?

finaidfollies, at 8:15 am EDT on July 26, 2007

On hoarding university endowment funds

Lynne Munson is to be commended for her work on the subject of endowment hoarding. Her article stated that endowment funds at Harvard alone are valued at $28 Billion. Let’s crunch a few numbers to see what this means in the real world. Using only a 3% rate of return, the Harvard endowment fund should earn at least $840 Million per year. The Cost of Attandance at Harvard is listed on their webpage at $50,950 per year, undergraduate. Of this amount, $31,456 is for tuition an fees. There are about 6,700 undergrads at Harvard and about 12,400 grad students. On a per student basis, endowment income alone should be about $43,979 per student. These figures are truly startling! When you look at the rising cost of attandance in higher education, they add legitamacy to Ms. Munson’s thesis. It is unquestionable that we need to rein in the predatory lending practices among some in the student loan industry. But it is equally true that our most elite universities and colleges must also shoulder much of the blame for the greed that has infected higher education to the great detriment of a whole generation of American students.

feudi pandola, at 8:15 am EDT on July 26, 2007

I have no quarrel with your assumption that more endowmwnt money could be used for student aid, which unlike reducing tuition for all, allows the benefit to be directed to those who cannot afford to pay. However, the approach is feasible at only a small fraction of institution who have significant endowments. While some public institutions, as you note, do have sizable endowments, and more are developing them as a safety net for declining state funding, most publics do not have the option of spending endowment funds they do not have. Likewise, many private institutions have limited endowmwnts as well. While every little bit helps, we need a more universal solution to the problem.

Richard Tombaugh, at 8:25 am EDT on July 26, 2007

Time for Needs Testing at the Institutional level?

Reading this article and comments made me wonder — is it time to needs-test institutions to determine if their students can participate with specific aid programs?Does Harvard really need access to Pell Grant funds at the same level that an inner city community college does?

A very thought provoking article.

Observer, at 9:15 am EDT on July 26, 2007

Ms. Munson makes some interesting points, but fails to understand (or at least fails to mention) that University endowment spending is ALREADY offsetting the cost of tuition. At most institutions, the tuition a student pays does not fully cover the cost of educating that student. It is the endowment spending that offsets the remainder of those costs. It may be time to spend MORE endowment money on this, but to imply endowment spending doesn’t offset tuition costs already smacks of sensationalist journalism.

Kyle Johnson, at 9:30 am EDT on July 26, 2007

Wanton Greed = SLM, NNI

- Three corporate Jets - #2 Most Profitable Company in America -$57 million CEO annual compensation -$270 million Chairman compensation for 2007 -Exec VP commissions 60 original works of art-Chairman builds private 18 hole golf course

That description applies to Sallie Mae

That wanton greed and conspicuous consumption does not apply to colleges and universities. We understand that NASFAA is still taking money from lenders for their regional meetings — even though their organization agreed not to.

Yes. . . Universities are highly inefficient. The recent scandals involving Financial Aid Administrators also brings into question their integrity.

But the most apparent greed and blatant excess is located with lenders — lenders that ARE NOT central to the education process.

Frederick, at 9:50 am EDT on July 26, 2007

Excellent Article!

Someone on a discussion group recently proposed funding “by and for the students.” I like that. I think this is where Alumni Associations can really help, not just with grants and scholarships for current students but for alum with loans as well. Or even consider the reverse process: Alums support current students with the idea that when current students graduate, they pay back what they were given. Alumni Associations operate somewhat to this extent already, which is why it’s important to give to them...BUT...when students graduate with huge loans, it becomes impossible to give back to anyone (I mean outside of working inservice fields, being a good citizen, etc. I don’t mean that in a demeaning way).

This is also where colleges can get more into direct lending, where the money goes back to the college and NOT back to lenders. Of course, the colleges and Associations have to be careful here—don’t hike interest rates or tuition to suit some institutional whim. Provide a viable service to students. I know I got a Perkins loan right through my state college, and it’s one of the first loans collected after graduation (or at least, it was that way in 1995). The payments were manageable because they didn’t include huge, accrued interest. I paid it off. I felt proud. I was able to give back to the college that meant so much to me.If I had money, I would love to provide merit scholarships to the Community and State colleges from which I graduated. But how can I or other students do that when they get out college already under the financial gun?

The programs are already in place in many colleges and universities. The programs just need to be strengthened.

kgotthardt, at 9:55 am EDT on July 26, 2007

The article, I think, misses out on a larger point: most financial aid goes to students who are not at these top 50 schools with large endowments. To focus on Harvard is the worst example. At Harvard, the average student can either afford to pay for their education, or they receive substantial funding from the university to attend (for some under a certain amount, it is free) if they are accepted. As for the University of Texas: large research universities might have a large endowment, but per capita, it is much lower than many colleges with 1/4 of its endowment. Additionally, UT- Austin, the flagship, only gets about less than half that amount. While it could subsidize tuition, the tuition is already the lowest in the country for a school of its calibre, and it seems like a better interest for UT to save for a rainy day and continue to try to become a better research university. Writers looking at the money always do so from outside of an institutional perspective based upon competition with ones peer groups. People with money should spend it; but they also want the university to be high up on the US News and World Reports. This duality is a paradox that people need to address. We either want cheap undergraduate degrees or we want to bulk up our research to compete with the world. It’s hard to have it both.

Now schools like Indiana University North-west or Ohio State-Lima are in a different situation and the author, to be balanced, should have focued upon them because they have no money. The article might have focused as well on schools that are chronically underfunded by the state and by their larger parent universities. This would have added some balance to the story. If one wants to complain against the high endowments, fine, but when one starts examining where the money is going (or what it is being saved for), there finds that there are no multi-million dollar CEO packages, private jet, or anything else associated with the for-profit market, and ineveitably, the universities are projecting far into the future, which seems like a good thing to me.

B, University of Texas-Austin, at 11:50 am EDT on July 26, 2007

describes elephant

Here we go again. Ms. Munson examines the leg of the elephant and thinks she has described the entire beast. One size fits all solutions never work.

Rather, than trying to find a magic bullet that can be applied in an overarching way, it may be time for us to realize that each institution has folks who are charged with running the school, and whether you agree with whether they are doing a good job of it or not, it is just possible they have a better understanding of what is needed for their college than all of the brainiacs on this blog.Further, if college is so expensive and the FAFSA is so complicated why does the number of college goers keep going through the roof. A larger percentage of the U.S. population is going to college then ever before in our history. We are even paying for illegals to go to school. Perhaps the sky is not falling.

Blind Man, at 1:25 pm EDT on July 26, 2007

“Tuition-free MIT”

Philip Greenspun wrote an essay in 1998 called “Tuition-free MIT” which has attracted a lot of attention on the web since it was first published. Reform-minded readers should consider his arguments:

http://philip.greenspun.com/school/tuition-free-mit.html

R.J. O’Hara, at 3:00 pm EDT on July 26, 2007

Bravo to Lynne Munson

The hardest part of covering or analyzing this endowment situation is that the wealth aggregated at the top is so huge that no one believes what you write.

With $27 billion in endowment at a 10% return (near the NACUBO average, a rate low enough to get to ensure the firing of most investment managers), Harvard could pay 30% in taxes, which would be enough for 200,000 new Pell Grants. That’s a number big enough to be a national policy question; this point is not just a potshot at Harvard.

Harvard could do this and still eliminate tuition. I’ve done the math across the Ivy League, with Stanford, Grinnell (endowment of $1 million per student), Williams and all. I’ve done hard time in finance in education and in business. My policies and wishes may be unpopular with some. Even my critics concur with the math.

I’m the first to commend these institutions for excellent management overall. The wealth derives from hard work, immense alumni generosity, and superb investment management. When, though, is enough enough? The U.S. already has a one-size-fits-all endowment tax policy. The poorest college is treated the same as the wealthiest. The U.S. doesn’t have such a tax policy for individuals or corporations. What you pay depends on what you have and what you’ve earned.

What the answer is to this situation needs sunlight, as Lynne Munson says. Right now, there is no debate at all. The current tax-free hoarding equates to millions of Pell Grants, as one example, a year.

A student just came by at Bunker Hill Community College. This summer, for the first time, she’d had three meals a day for five weeks in a row. This was due to a wonderful, endowed program at Vassar College. Yes, plenty of these funds do good. The funding, though, at too many places is way over the top in amounts that add up to millions of Pell Grants. Now she’s back here but the funding for her education isn’t here.

Go Lynne Munson.

Wick Sloane, at 4:35 pm EDT on July 26, 2007

Wow. That’s astounding

Wow. I must admit that I was unaware just how large many university endowments were. I knew that they, structurally, sit in the catbird’s seat with respect to higher education finance, but didn’t realize the astounding levels of funding levels they had achieved.

Well done. This gives those of us mired in outrageous student loan debt—measured in multiples of the original amounts we borrowed with penalties, fees and interest—something to consider.

Alan Collinge, founder at Studentloanjustice.org, at 8:40 pm EDT on July 26, 2007

Gimme a break

I would expect that if Ms. Munson enjoys any economic success from her forthcoming book on this subject, she should squander it by following her own advice for these well managed endowments.

Ben Ferrell, A College CFO, at 8:40 pm EDT on July 26, 2007

A point that might be added: the need-based aid always includes a student contribution from a job. In the days when British undergraduates paid no tuition and received a maintenance grant, Oxford and Cambridge were able to insist that student take on no vacation jobs, using vacations instead for ambitious programs of reading. It was possible to work at a much higher level of concentration because academic work was not constantly being interrupted to wait tables, perform clerical work and the like.

An American student who had established a career as a successful drug dealer in high school could presumably achieve a level of rentability for his or her time comparable to what he or she might later expect when armed with a degree from Harvard or Stanford; most students at top universities, however, are prevented from getting the greatest intellectual value from these expensive courses by the requirement to earn money in (generally low-paid) student jobs as they go along.

Helen DeWitt, Dr, at 7:00 am EDT on July 27, 2007

Great article, I would not have expected that!

Manuel, at 6:30 am EDT on July 30, 2007

After more than a decade as a university admininstrator, I agree that colleges are miserly in their endowment distributions. In comparing to private foundations, these foundation are required by law to give away at least 5% of their assets in a year. Colleges have no mandated level and practice varies widely by college. I think two things would help: require colleges to pay out 5% per year (not the current voluntary practice of some percentage of their multi-year moving average) and remove the underwater limitation on endowment funds (as enacted by Congress).

Chris, at 3:20 pm EDT on August 16, 2007

responding to CHris’s 8/16 comment

Chris:

Can you explain this “underwater limitation” you mention?

Lynne Munson

Lynne Munson, Adjunct Research Fellow at Center for College Affordability and Productivity, at 5:00 am EDT on August 31, 2007

Wndowment spending does offset the cost of tuition. The tuition a student pays does not fully cover the cost of educating that student at most schools. The endowment spending usually offsets the remainder of those costs.

Mac, at 4:00 am EDT on September 11, 2007

I found the article very interesting and the statistics quite impressiveStill a little difficult to understand from a newbie in the finances field

Chancer, Chancer, at 5:25 pm EDT on October 29, 2007

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