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College Investments Net Good Returns, Questions About High Costs

Colleges and universities raked in money by the billions last year. But their investing success now has a price a movement in Congress to force the wealthiest schools to spend more of their money to keep down tuition.

In recent weeks, a string of colleges and universities have announced enviable investment results. Leading the way was Yale, which earned 28 percent over the year ending June 30, increasing the school’s endowment to $22.5 billion overall.

Harvard, the world’s wealthiest university with $34.9 billion, beat the market again with a 23 percent return. There also were good returns for smaller schools such as Bowdoin (24.4 percent) and William & Mary (19.2 percent).

But while those numbers were coming out, some members of the Senate Finance Committee in Washington were wondering aloud why the rise in endowments isn’t stemming tuition increases. At a hearing last month, lawmakers batted around the idea of forcing at least some of the wealthier colleges to spend more savings on reducing costs.

“Senators, what would your constituents say if gasoline cost $9.15 a gallon?” Lynne Munson, an adjunct fellow at the Center for College Affordability and Productivity in Washington told the committee. “Or if the price of milk was over $15? That is how much those items would cost if their price had gone up at the same rate that tuition has since 1980.”

In the mid-1990s, a billion-dollar endowment was a mark of the financial elite, a club with just 17 schools in its ranks. By last year, 62 colleges had hit the mark. Within a few years there will likely be 100.

Private foundations are required by law to spend at least 5 percent of their endowments each year on their missions, but public charities a category that includes colleges face no such requirement. Holding colleges to the same standard is an idea that clearly interests Iowa Republican Sen. Charles Grassley, the minority leader of the Senate Finance Committee and Capitol Hill’s closest scrutinizer of non-profits.

“It’d be good to see the very elite institutions, with the richest endowments, take the lead and create a ripple effect throughout higher education to make college more affordable for everyone,” he said in a statement. It’s unclear right now, both Republicans and Democrats say, whether the proposal will make it out of the committee, which is considering several ideas related to taxes and higher education.

In fact, colleges spent on average 4.6 percent from their endowments last year, according to the latest figures from National Association of College and University Business Officers.

But if the billionaire colleges alone spent the full 5 percent, that would mean an extra $1.5 billion available annually for financial aid, calculates Michael Dannenberg, director of education policy at the New America Foundation, a Washington think-tank. He says such a requirement would be fair, given that colleges are allowed to invest tax-free. That perk has boosted many endowments by billions and carries an obligation to public service.

Higher education officials were angry they weren’t allowed to speak out against the proposal at a hearing last month, but submitted their own testimony last week, arguing they spend plenty on public service and that endowments aren’t simply savings accounts that can be tapped at any time for any reason.

Many endowment funds come with strings attached by donors on how they can be used.

Colleges also have to budget prudently, taking market swings into account, and they try to avoid big jumps in spending just because the market did well in a particular year. But by sticking to gradual adjustments, they can look stingy.

For instance, Yale is slated to get more than third of it’s annual budget $843 million from its endowment this year. But because its investments did so well, that’s only about 3.7 percent of the endowment.

But the underlying issue is that the proposal would represent a major encroachment by Washington into university affairs. Colleges oppose government involvement in anything from how they teach to the criteria they use in admissions. They would not take kindly to Congress directing them precisely how to spend their own money.

“We don’t think as a general matter the federal government ought to be telling private philanthropic organizations, that have been around in some cases since before the federal government, how to spend their money,” said Terry Hartle, senior vice president of the American Council on Education, the main group representing colleges and universities in Washington.

Still, Hartle acknowledges colleges will have to take seriously the complaints about colleges costs with which constituents are deluging lawmakers.

“There isn’t a college or university president in the country that doesn’t recognize that federal policy makers in both houses of Congress in both parties are very concerned about rapidly rising prices in higher education,” he said.

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