America’s universities raised a record $40.3 billion last year, according to the Council for Aid to Education. Harvard’s endowment is made up of 13,000 funds and is its largest source of revenue by far. Endowments are not usually used to lower tuition fees, but they can be used to provide scholarships and financial aid to students who cannot afford to pay (70% of students at Harvard get some assistance with fees and living costs).
Some lawmakers are wondering whether threats to change the tax-exempt status of endowments might be used to persuade colleges to bring down the cost of tuition, which has increased by 220% in real terms since 1980. Nexus Research and Policy Centre (a group set up by the University of Phoenix, which is for-profit and therefore not tax-exempt) says colleges receive $80 billion in support from state and local government every year, which ought to give politicians some leverage in return.
In January Tom Reed, a Republican congressman from New York, proposed a bill requiring endowments with assets of more than $1 billion to allocate 25% of their income for financial aid or lose tax-exempt status. Two congressional committees, the Senate Finance Committee and the House Ways and Means Committee, have sent letters to the heads of the colleges with the biggest endowments asking about spending, conflicts of interest and fee arrangements for money managers. The 56 largest private university endowments have until April 1st to explain how they use their tax-free investment earnings.
The colleges have their defenders. “Most of these places are already providing a fair amount of financial aid for students well beyond the poverty line,” says Kim Rueben of the Tax Policy Centre. Kevin Weinman, Amherst’s chief financial officer, says his university’s endowment provides $90m to the college’s budget, $30m more than tuition, room board and various fees combined. This school year, it will spend $50,000 per student to fund financial aid, pay faculty and fund student activities. After Congress last examined the topic in 2007, more colleges began to award grants instead of loans. Financial aid has doubled over the past decade. Some schools, like Brown in Providence, Rhode Island also make voluntary payments in lieu of property taxes.
In addition to pointing out their generosity, colleges also argue that forcing them to spend endowment money on free tuition might even be illegal. Donors can restrict their tax-exempt gift to a legally-binding particular purpose, such as creating a chair, establishing a scholarship or building a new lab. Around 70% of endowments are restricted funds. Not abiding by a donor’s wishes can result in a lawsuit. Princeton was sued by the heirs of the A&P grocery fortune who claimed a gift of $35m made in 1961 was misused and not spent as directed. Amherst, which has a $2.2 billion endowment, ran the numbers and found that if it increased annual spending to 8% from its current level of 4-5%, it would have to rely on tuition to fund running costs. After 25 years its endowment would be 60% smaller than it is now.
If the wealthiest colleges already spend so much on financial aid, where is the problem? Mr Unz argues that relentless endowment-fuelled spending on new buildings, sports facilities and the hiring of administrators has created an arms-race in higher education, pushing up prices at those universities that are not fortunate enough to have lots of generous benefactors. Harvard could scrap tuition payments without damaging its finances or touching the restricted portion of its endowment, he reckons. Furthermore, the abolition of both complicated financial-aid forms and terrifying sticker-prices for tuition (ie, before financial aid is calculated) could, he argues, do much to encourage applicants from beyond the plutocracy.
Correction: This piece has been updated to provide the correct figure for the contribution of Amherst’s endowment to the college budget.