Wealthy Colleges Under Pressure To Use Endowments For Financial Aid

Although Congress has yet to approve any new rules on the topic, the debate on Capitol Hill about wealthy colleges and their endowments is prompting elite institutions to adopt friendlier policies toward lower-income students, a Washington, D.C., audience was told Friday.

“This is what’s changing the tone among colleges,” said Dean Zerbe, senior counsel to the Senate Finance Committee, at a forum sponsored by the American Enterprise Institute in Washington, D.C., last Friday. “It’s a tremendous positive.”

Finance Committee members such as Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., have raised questions about the $411 billion in endowments at U.S. colleges. Unlike nonprofit foundations, colleges are not required to spend 5 percent of their endowments per year, and many colleges’ funds are a well-kept secret. In mid-January, the Finance Committee asked 136 colleges with the largest endowments to provide more information about how they set tuition and award financial aid.

Meanwhile, some reformers inside and outside government have suggested that colleges spend more of their funds on at-risk students or lose some of their tax-exempt status.

Recent decisions by Harvard, Yale and other elite institutions to provide more need-based aid to students are signs that Congress’ focus on endowments is having an effect, Zerbe said.

Speakers at the forum on “University Endowments: Their Role in Higher Education and Possibilities for Reform” offered a litany of statistics about higher education’s surging endowments, particularly among Ivy League institutions and other elite schools. According to the College Board, for example, the wealthiest 10 percent of private universities could use their endowments to provide $454,000 to every full-time student.

Yet universities, overall, spend less than 4 percent of their endowments to support their mission annually. “They’re hoarding a lot more,” said Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity.

According to Munson’s research, 76 colleges have endowments above $1 billion. If colleges spent just 3 percent of endowments on financial aid annually, many Ivy League colleges as well as the University of Virginia and Pomona College in California could offer free tuition to all of their undergraduates.

Tuition bills also would drop by half at 32 colleges, including the University of Michigan.

“We think of colleges and universities as needy, but many are not,” she said.

But Charles Miller, who chaired Secretary Margaret Spellings’ Commission on the Future of Higher Education, said he was “unalterably opposed” to any minimum payout requirement.

“It’s fundamentally not good public policy for government to intervene to that level,” he said.

Instead, Miller urged Congress to focus instead on a “dysfunctional” higher education finance system in which states and universities are awarding more merit-based financial aid to families with the capacity to pay for college.

“We’re creating education inequities for people who have advantages already,” he said.

The federal government also may want to examine whether elite, wealthy universities should continue to receive a large share of federal research grants. Many elite universities “receive subsidies that could better be spent elsewhere,” Miller said. “Why not create new research institutions?”

A higher education representative at the forum also opposed a minimum annual payout rule but for different reasons.

“University endowments do not lend themselves to a one-size fits all solution for payouts,” said Terry Hartle, senior vice president at the American Council on Education.

Most endowment funds are restricted, meaning that donors have specified that funds be spent on specific programs. “It is not a checking account and not a money market fund,” he said. Harvard, for example, has 11,000 separate funds within its endowment, all with specific purposes.

Public colleges and universities also may have trouble meeting a minimum payout requirement, because of state regulations in addition to restricted funds, he said.

–Charles Dervarics

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