‘Bankers in the Ivory Tower’

Charlie Eaton’s new book, Bankers in the Ivory Tower (University of Chicago Press), is much more than a survey of the role of financiers in higher education. It is a critique, as his subtitle makes clear: “The troubling rise of financiers in U.S. higher education.” Emphasis on troubling. Eaton sees financiers damaging higher education in every sector: from elite private research universities to for-profit colleges.

Eaton, assistant professor of sociology at the University of California, Merced, answered questions about his book via email.

Q: What’s wrong with financiers helping colleges that already have lots of money make more money? Some of the wealthiest colleges use their endowments (in part) to support low-income students, after all.

A: Financiers mainly give their money to wealthy colleges that enroll very few students over all, and fewer students still from disadvantaged backgrounds. For example, Princeton enrolls only around 5,000 undergrads, up just a little more than 30 percent since the 1970s. Raj Chetty and others also have shown that top privates like Princeton tend to enroll more students from the top 1 percent of the income distribution than from the bottom 60 percent combined.

Meanwhile, financiers helped Princeton increase its endowment by 847 percent from $2 billion in 1973 to $22 billion in 2016. As a result, Princeton now spends about $100,000 per student on operations annually just from its endowment. This type of spending has enabled Princeton and other wealthy private colleges to become the last bastion of debt-free higher education in America. I show this in the following figure that plots the percent of first-year students who are debt-free by different strata of colleges and universities.

Instead of just going debt-free for its small handful of low-income students, imagine if Princeton instead doubled its undergraduate enrollment and spent just $50,000 per student from its endowment annually. It would be a better, more inclusive and still debt-free university that contributes more to educational and economic equity.

We could do a lot more for higher education equity and inclusion if we increased public university funding with higher taxes on financiers instead of letting financiers donate mainly to elite private universities. Take the University of California, Berkeley. Berkeley increased its undergraduate enrollment by 69 percent, from 18,822 students in 1970 to 31,814 students this year. And Berkeley has enrolled more low-income Pell Grant recipients than the entire Ivy League combined in several recent years. Other public universities enroll even more students from diverse economic backgrounds.

But overall funding per student at Berkeley and other public universities has declined in recent decades. That’s because tax cuts for financiers and other well-off Americans made it impossible for states and the federal government to adequately fund higher education. Public universities could do even more than they already do if we taxed financiers and taxed wealthy endowments, which aren’t used sufficiently to benefit all students.

Q: Can you discuss how elite private universities expanded the representation of hedge and equity funds on their boards? Why do you think public universities haven’t had the same increase?

A: Elite private college and university boards rest at the pinnacle of colleges and universities as hubs of the elite. Private college and university boards are deliberately populated by the largest donors and fundraisers for the institution. Board members are also overwhelmingly drawn from the alumni who tend to donate most generously to their own alma mater. With the most alumni among wealthy private equity and hedge fund managers, the most prestigious colleges and universities have a larger pool from which to recruit these financiers to their boards. The most prestigious universities, moreover, can leverage their higher social status to recruit private equity and hedge fund financiers at higher rates.

Accordingly, elite private universities dramatically increased private equity and hedge fund representation on their boards in recent decades. Among the top 30 private universities in the Times Higher Education rankings, the share of board members from all of finance for these colleges increased from 17 percent in 1989 to 29 percent in 2003, plateauing at 35 percent since 2014. Roughly half of this increase came from growth in private equity and hedge fund manager board membership, which increased from 3 percent in 1989 to 9 percent in 2003 and to 18 percent since 2013.

But even among billionaire alumni of top 30 private colleges, private equity and hedge fund managers are almost twice as likely as billionaires to serve on these boards. This is because elite university boards are especially valuable to financiers as conduits for endowment capital and private information from other elites that they use to raise capital and invest in assets that they think are undervalued by public financial markets.

Q: Why do you blame bankers for the huge increase in student loan debt?

A: A critical and mostly overlooked cause of the explosion of student debt was expanded government subsidies to Wall Street from the 1992 Higher Education Act reauthorization and legislative tweaks to the act in 1993 and 1994. The key parts of the act were literally written by bankers. And Wall Street made huge profits off of new government subsidies.

From the late 1970s until the new subsidies in 1992, total student loan borrowing was flat at around $20 billion annually in 2016 constant dollars. Total borrowing per student was also flat. After passage of the act, borrowing more than quintupled to a peak of almost $120 billion annually. Average borrowing per student tripled. The act did four things that caused the surge in debt:

• First, the act eliminated means tests for federal student loans. Before this, only lower-income students could borrow using the main federal loan program.
• Second, the act doubled the cap on how much a student could borrow by the end of their undergraduate studies from $30,000 to over $70,000 in 2016 constant dollars.
• Third, the act eliminated the borrowing cap for parent loans.
• Finally, and this was crucial, the act gave a “guarantee” subsidy to private lenders to make about half of all federal loans. Under this guarantee, the Treasury would pay private lenders what they were owed if any borrower failed to repay. This regulation effectively guaranteed a profit for private lenders and cost about $6 billion more annually than for the Treasury to just make the loans to students directly.

These four provisions of the act were taken almost directly from a proposal submitted in congressional testimony by the National Council of Higher Education Loan Programs. The council had overlapping membership with the Consumer Bankers Association, who were also major players in lobbying for the bill. The new subsidies from the bill were profitably tapped by Sallie Mae, Bank of America, Wells Fargo, Citi and banks that merged to form JPMorgan Chase.

Q: How are financiers involved in public higher education?

A: The main impact of financiers on public higher education comes from the ways that financiers captured tax cuts and subsidies involving elite colleges’ endowments at the top and for-profit colleges at the bottom. This resource capture diverted resources away from public universities in the middle.

State funding per student remains around 20 percent below its peak in the late 1970s. A restoration in federal Pell Grant spending to 1970s levels under the Obama administration has not offset this decline in state spending.

Meanwhile, endowments benefited from $20 billion in tax expenditures as of 2012, with that figure likely higher today. Led by Wall Street–owned colleges, for-profit colleges captured around $10 billion in Pell Grant subsidies at their peak in 2010. Redirecting this $30 billion in combined subsidies would be enough to double the federal Pell Grant program—enough to make public colleges and universities effectively debt-free for low- and middle-income students.

The Obama administration showed that you can make these kinds of direct reallocations of taxes and other subsidies when it eliminated the student loan guarantee subsidies that were awarded to banks in the 1992 Higher Education Act reforms. As part of the 2010 Affordable Care Act, Obama and Congress used savings from ending the $6 billion annual guarantee subsidy to budget the largest Pell Grant funding increase since the 1970s. Since the 1980s, private equity and hedge funds have reaped even bigger increases in after-tax profits from capital gains tax cuts, the carried interest loophole and other forms of tax avoidance. From this expanded after-tax windfall, private equity and hedge funds in turn pass a larger cut on to their wealthy investors, including wealthy college endowments.

Q: How does for-profit higher education come into play?

A: Private equity managers, including managers with capital from endowments, acquired 994 for-profit colleges between 1988 and 2015. They did so to capture tuition revenue from expanded loan programs.

It is hard to overstate how important this private equity invasion was in the explosion of enrollment at predatory for-profit colleges in the U.S.—colleges that overwhelmingly left students with crushing debts and no economic benefits.

This chart illustrates the centrality of private equity by plotting for-profit college enrollments over time by colleges’ type of financial ownership. In brown, we see that enrollments have been relatively flat at around 500,000 students in colleges with what is called privately held ownership. Privately held ownership includes family ownership and typically involves ownership by someone who has worked in the field the school focuses on, like a beautician, graphic designer or medical technologist. These schools have no ownership by outside investors. These are also the schools that private equity investors started buying up by the dozens in the 1990s.

Green shows enrollment at schools that were owned by a private equity firm. We see that these enrollments started to grow in the late 1990s and reached a peak of around 500,000 in 2010. Just as important, yellow is enrollments at schools that were bought by a private equity firm but then were taken public in an initial public offering to sell their stock on the stock market. These schools had total enrollments of over 600,000 around their peak in 2010.

Red is enrollment at companies that are publicly traded without any prior ownership by private equity. About a third of that enrollment is from just one company, the parent company of University of Phoenix.

So, in sum, private equity investors oversaw much of the growth in for-profit colleges that sucked up federal student loans and other subsidies.