Lawmaker With the Idea Higher Ed Leaders Hate

U.S. Representative Tom Reed discusses his legislation requiring colleges with wealthiest endowments to spend more on student aid -- or face penalties.

May 12, 2016
U.S. House of Representatives
U.S. Representative Tom Reed

U.S. Representative Tom Reed says he’s open to modifying a controversial proposal to channel spending from large college and university endowments into student aid, even as he pitches the idea to presidential candidates and takes flak from the higher education community.

Reed, a Republican from New York, is drawing up legislation that would affect universities and colleges with endowments of more than $1 billion. His proposal would require those institutions to take 25 percent of the amount they earn on their endowments annually and pay that money as grants toward students’ cost of attending. For some colleges with very large endowments -- and typically already with generous aid programs -- this requirement would result in large increases in spending on student aid.

The idea comes as Capitol Hill lawmakers ramp up scrutiny of endowment spending by wealthy universities. But it’s drawing criticism as an unnecessary and legally dubious burden on colleges and universities. Reed’s proposal has also been questioned for seeking to address college affordability but missing underlying issues.

For his part, Reed is not casting the idea as a silver bullet fixing the problem of rising college costs. He’s describing it as a bridge, a step to take along with other measures. He’s already talking about possible additions to the proposal, including the idea of requiring universities to draw up spending plans geared toward keeping tuition increases in line with inflation.

“These institutions have done very well, and I applaud them for accumulating these resources,” Reed said. “But we need to get through this crisis.”

Reed is looking for legislative ways to check rising education costs. At the same time, he’s trying to avoid tapping taxpayer dollars, which is always politically risky for a Republican congressman, especially in an election year. And he’s seeking to balance those goals while attempting to focus on a slice of the student population that may not have incomes low enough to qualify for Pell Grants.

Reed’s proposal specifically requires grants generated by endowment earnings go toward working-family students -- defined as coming from families with incomes between 100 and 600 percent of the poverty line. For a family of four, that means grants prompted by the legislation would generally go to students from families earning between $24,300 and $145,800 under 2016 federal poverty levels. Universities and colleges would be allowed to pay more to families at the lower end of the range. The upper end of the range would be well above the U.S. median household income for families of $68,426 in 2014. But with the most expensive colleges having all-inclusive sticker prices of well over $60,000, many with above-average incomes could consider elite colleges out of reach without student aid.

Proposed penalties would escalate depending on how many times an institution misses the 25 percent mark. For the first year of noncompliance, a 30 percent tax would be levied on the undistributed earnings required to go to students. The tax escalates to 100 percent for a second year of noncompliance, and institutions could lose their tax-exempt status if they were out of compliance for three years.

They would not incur penalties if all of the cost of attendance for working-family and low-income students were covered.

Many of the proposal’s details are still being drafted. Asked whether entire universities could lose tax-exempt status under the bill or whether only their endowments would be affected, a spokeswoman provided a statement saying the details are not fixed.

“Questions like these are contingencies that we are taking under advisement as we move forward in this process, but once again, I would emphasize we are still ironing out the details of the bill,” it said.

The proposal would affect nearly 100 institutions. A total of 92 U.S. colleges and universities had endowment funds valued at $1 billion or more in 2015, according to the most recent annual survey from the National Association of College and University Business Officers and Commonfund Institute. That was just a small portion of the 828 endowments ranked.

It’s an even smaller portion of the thousands of higher education institutions across the United States, said Steven Bloom, director of government relations for the American Council on Education, which represents 1,700 member institutions. Reed’s proposal fails to get at the core factors driving higher student costs -- factors like public institutions’ struggles drawing state funding, rising human resources costs and increasing health care bills, Bloom said.

Fundamentally, the American Council on Education opposes the idea of government restricting endowment spending.

“It would be very difficult,” Bloom said. “We think it would be improper for the federal government to mandate the kind of approach that Mr. Reed is talking about.”

Reed is willing to change key cutoffs in his legislation. The numbers he’s proposing were intended as a way to start the conversation, he said. The $1 billion limit could be adjusted, as could the requirement that 25 percent of endowment earnings be spent.

“It truly is an arbitrary number,” Reed said. “That’s something we can work on. We can base it on something. We recognize they need to have control over their resources, too.”

But Bloom said the American Council on Education is unlikely to change its stance.

“I don’t think we’d be interested in negotiating over the terms of the bill to make it less bad,” Bloom said. “It misses the mark.”

The legality of Reed’s proposal stands as another major question. Many parts of endowments funds are restricted after being given by donors for dedicated purposes. Colleges and universities have a legal requirement to spend restricted parts of endowments -- and their earnings -- in specific ways, said Ronald Ehrenberg, the director of Cornell University’s Higher Education Research Institute. Cornell lies within Reed’s upstate New York district.

“He doesn’t seem to understand that the endowment is not one amorphous thing,” Ehrenberg said. “It is largely a set of gifts that have been given to the university for specific purposes. Some of the gifts are for financial aid. But some of them are for things like supporting faculty positions or supporting programs.”

Requiring universities to spend more of their endowments on tuition could have unintended consequences, Ehrenberg said. Such a move could suck money from endowment spending on other priorities, which in turn could lead colleges and universities to raise tuition to pay for those priorities.

Only the wealthiest institutions can afford to provide all or most of their financial aid from their endowments, Ehrenberg said. He added that any affordability efforts focused on endowments are bound to miss a large swath of students.

“The problem, in terms of affordability of American higher education, is not at the rich privates,” Ehrenberg said. “At the rich privates, virtually all of the aided students are paying less in real terms now than they were five or 10 years ago.”

And the relationship between endowments, financial aid and other spending is more complex, said Jessica Sebeok, associate vice president for policy at the Association of American Universities, a group made up of 62 top research universities in the United States and Canada. Requiring spending based on endowment returns in one year can make it harder for institutions in years when returns are leaner, she said.

“Increasingly endowments have come to play a significant role in bridging those gaps and making it possible for universities to pursue their missions,” she said. “In a good year, Harvard and others will do well. Very often, in a bad year, they’re relying more heavily on reserves. And again, the whole purpose of endowments, really, is to find that equilibrium between present needs and future purposes.”

Reed’s proposal is one of several ideas to be floated regarding endowments. Others have included requiring a certain percentage of funds to be paid out annually, taxes on endowment earnings and limits on tax benefits for some gifts to endowments.

Congress has shown renewed interest in endowments as well. Earlier this year, two congressional committees asked 56 private institutions with endowments over $1 billion for information on how they were using their endowment assets. When Harvard and Princeton Universities responded to the inquiry, they said their endowments support undergraduate student aid and other functions, although they are not general funds.

Harvard’s endowment is the largest in the country, according to NACUBO and Commonfund. It stood at $36.4 billion in 2015, up 1.6 percent from 2014.

The latest interest in endowments comes after other efforts in recent years. A 1 percent tax on the investment earnings of college and university endowments worth more than $100,000 per student was part of then-Representative Dave Camp’s proposed tax code overhaul in 2014. Republican Senator Chuck Grassley scrutinized college and university endowments in 2007 and 2008, efforts often considered to have stoked larger aid packages for low- and middle-income students at wealthy institutions.

Now Reed said he’s pitching his idea to presidential campaigns including that of presumptive Republican nominee Donald Trump and Democratic front-runner Hillary Clinton. He’s not bullish on the legislation’s prospects for this calendar year. But he thinks it could be taken up in 2017, particularly if tax reform becomes a priority.

Another idea Reed is considering would introduce the idea of cost-containment plans. His legislation could require universities and colleges to file cost-containment plans geared toward keeping tuition from rising faster than the cost of inflation. The government could require such plans in lieu of a financial penalty after an institution first misses the 25 percent student-aid-spending requirement.

Reed freely admits the reactions to his endowment proposal have not all been positive.

“Obviously, the folks in the higher ed arena are concerned,” he said. “I get that. We’re talking billions of dollars that are in these funds that are generated over years.”

Still, Reed believes his focus on endowments has sparked a conversation.

“I’ll tell you, we have gotten the attention of institutions far and wide -- ones that would qualify for this $1 billion threshold, and others that are just below it,” Reed said.


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