Colleges or investment firms?

10 mins read

When I was doing research for this column, I noticed an Atlantic article entitled “Rich, Stingy Colleges.” Intrigued, I clicked on it, and a picture of Parrish lawn in the springtime filled my computer screen. So a good start for my writing process, but less so for Swarthmore. One of the major developments in higher education over the past few decades has been the ballooning of university and college endowments, concentrated mostly at the top. The top 4 percent of colleges and universities in the U.S. control 75 percent of all endowment wealth. Harvard’s endowment stands at $37.1 billion, with growth at a “disappointing” 8.1 percent last year — returns around 10 percent are more typical. Swarthmore’s is a comparatively measly $2 billion, but the per-student endowment is the third-largest in the country. You would think that larger endowments would mean more money for aid. But tuition costs continue to rise and tuitions remains difficult to pay for many working and middle-class families. The evidence points toward universities and donors who have no clear sense of mission, who prioritize wealth accumulation for its own sake, and who have shown a consistent inability to constructively reform themselves.
The general political mood seems to be turning against elite universities. In one of the very few instances where I agree with him, Donald Trump proposed a tax on the largest endowments, and the House Ways and Means committee sent a letter to 56 colleges and universities asking what composed their endowments and how they spent them. Universities retort that while their endowments may be exceedingly large, they can’t spend it all, only the return they get every year. This is partly true: many donors demand that their gifts be “in perpetuity” with only the returns spent. But while returns frequently hover around 10 percent, colleges spend only a fraction — Swarthmore only spent 3.7 percent of its return last year, according to the Atlantic. The rest goes back into the endowment. And schools often use hidden “administrative fees” to shift donor money into unrestricted funds. According to the James G. Martin Center, a university charging a 1 percent fee — like Rutgers — would earn triple the endowment of the original gift over 75 years, while only being obligated to spend the yearly earning on what the donor intended, not the fees or any of the original endowment. And much of the money not deposited directly back into the school’s “slush fund” is not spent on the pressing needs of financial aid. R.R. Reno, writing in First Things, notes that Princeton could spend $75 million of its endowment income to provide full scholarships to the quarter of students who receive financial aid. Which sounds like a lot of money, until he notes that Princeton’s average yearly income is $1.1 billion. Money goes into ever-expanding rosters of associate deans, fancy new dorms and landscaping, and other non-essentials. In an egregious example, Yale spent $480 million on hedge-fund managers for its endowment and $170 million on financial aid in 2015.
College presidents like to say that this helps create a rainy day fund for emergencies and maintains financial stability over time. But at least at the top level, endowments have grown beyond any reasonable “cushion.” Attempting to justify its $7 billion endowment, Duke University president Richard Brodhead claimed that the fund allowed Duke “to weather near-catastrophic situations, such as the crisis of 2008, when the … endowment lost 25 percent of its value.” Going from $7 billion to about $5 billion hardly seems like a near-catastrophe, and anyways, the Martin Center for Academic Renewal reports that in times of financial downturn, schools are far more likely to hike up tuition and slash payroll than actually spend their endowment. Focusing on the very long term is also a strange sort of reasoning. That kind of uber-conservative financial planning may be fitting for a trust fund, but schools have pressing near term obligations to invest in faculty, students, and educational resources. A $1 million gift may generate a 50,000 dollar scholarship every year, but spending it all at once, on many scholarships, will drastically increase access and create greater chances for more donors. The short term is preferable here, not least because more immediate graduates means a drastically higher chance of more gifts, sooner. Or if a university invests heavily in successful research, the payoff could come even quicker. Maybe some schools could even shore up declining humanities departments. After all, the point of college is education and research, not determining who can run the biggest hedge fund.
There are many useful proposals for reform in this area. One basic step would be subjecting the wealthiest universities to the same rules as other tax-exempt nonprofits and mandate they spend at least 5 percent of endowments on their “mission” — in this case, education, tuition, and research. Congress could also tax endowments that don’t spend, say, a quarter of earnings on aid for poor students. Even as universities report increases in aid, “the share of poorer kids in elite schools hasn’t much improved over time,” according to researchers at Stanford. Schools like Harvard enjoy comfortable majorities of students from the upper-middle and upper classes, while admitting just enough low-income and minority students to morally justify themselves. Of course, these two groups by no means necessarily overlap. More radically, donors and government could push for expansion of elite schools. Enrollment at the Ivies, for example, has risen marginally even as per-student endowment has skyrocketed and inequalities between the top and everyone else has grown. Why not have Dartmouth open a campus in Detroit, or Pomona and USC expand to the Central Valley? And if these schools’ traditional applicants turn up their noses at these locations, I’m sure there are plenty of local kids who’d be willing to go. It is absurd how little enrollment at top schools has grown relative to the country’s population, and if they don’t wish to expand core campuses, then satellites are an even better option.
Donors also have a role to play. The list of major gifts in higher education over the past few decades is overwhelmingly filled with big names: the Ivies, NYU, Northwestern, UChicago, and others. If you give hundreds of millions of dollars to an already elite school, as Phil Knight did for Stanford, there might be nicer buildings that are named after you, but not much will change. If you gave a $100 million to, say, Fresno State two hours south, the marginal benefits will be far larger and reach more students as well. In his podcast Revisionist History, Malcolm Gladwell tells the story of Henry Rowan, a wealthy industrialist who chose to donate not to his alma mater MIT, but to tiny Glassboro State. Asked to contribute $100 million dollars to MIT’s $750 million capital campaign, he realized that the 100 million would have much more impact at an underserved school. MIT, unsurprisingly, did just fine, and Glassboro was able to dig itself out of bankruptcy and build an engineering school.
Maybe that’s too much of a stretch, but places that receive tax exemptions and subsidies should at least try to function as the civic institutions that are meant to receive this kind of help.
Moving the cultural power now concentrated in certain schools to a more diverse swath of institutions would be better for this country — a diversification in student bodies, greater geographic dispersal, and more parity between the best and the rest would make the educational landscape a far healthier — and more interesting — place. Our tax dollars shouldn’t go toward expanding the gap between the top and the bottom, between (some) urban centers and everywhere else; they should be working towards unity in a culture that is increasingly polarized. Maybe putting some “liberal snowflakes” in West Virginia, or “redneck bigots” in Chicago would go a ways towards closing the gap.

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