College Endowments

As many of us know, tuition rates have been increasing at very high rates over the last forty years or so. Interestingly, the endowments have also been increasing in size at many universities. Recently, this has become something of a national issue.

According to Albert Phung, a college endowment is the monetary representation of all the money or assets that are donated to a university or college. The money from endowments is invested in order to allow it to keep up with inflation, as well as providing income for the university. These endowments are historically subject to fairly conservative investing strategies.

Most colleges or universities allocate about five percent of the total endowment for yearly spending. This percentage may not seem like much, but at schools with massive endowments worth tens of billions of dollars, this certainly amounts to a lot.

At the moment, the endowments at institutions of high education are subject to tax breaks because the endowments are used for charitable or educational purposes. According to the Boston Globe, Orrin Hatch, the chairman of the Senate Ways and Means committee has inquired about the endowments at fifty-six universities that have endowments larger than one billion dollars.

US News reports that Harvard currently has the largest endowment in the country, totaling over thirty-six billion dollars. Yale, Stanford, and Princeton took second, third, and fourth places respectively. Penn State’s endowment is currently at 3.64 billion dollars.

Hatch spoke about the inquiries, saying, “As Congress moves forward with efforts to reform the tax code, it is prudent we gather as much information as possible about how preferences in the tax code are applied.”

Universities have stuck with their guns, however, saying that their growing endowments are simply used to fund school operations and research. The endowments are also used to generate income for funding.

The president of the Association of Independent Colleges and Universities in Massachusetts said, “There’s not a need for a legislative fix. We’ve got a pretty good formula working, a lot of it driven by private dollars, and I think it would be unwise to tinker with that.”

The idea that this “formula” works is not a view shared by Republican Representative Tom Reed (NY), who proposed that schools with endowments of one billion dollars or more should have to spend twenty-five percent of their annual endowments on financial aid if they are to keep their tax-exemption.

In an article by Josh Freedman in The Atlantic, he points out that universities around the country are actually becoming less equitable to low-income applicants. He says, “High-income students account for about a third of the high-achieving students graduating from high school). But estimates suggest that 74 percent of students at the top 146 top colleges came from the richest quartile of households.”

Some schools have been able to recruit students in lower levels of the income bracket, such as Amherst College. Amherst has used money from its endowment to cover the costs that come with accepting students who need financial aid. But Amherst has a very sizable endowment, so not all colleges or universities would be capable of carrying this strategy out.

Cornell has an endowment of over six billion dollars. What has Cornell done in recent years? Well, in the 2009-2010 school year, Cornell took thirty-five million dollars from its endowment to help cover the costs of financial aid. Now, however, the school has decided to draw less money from its endowment for financial aid.

The struggles over how to use endowment money for financial aid extend to public colleges and universities, too.

“States are now spending 28 percent less per college student than they were in 2008, according to the Center on Budget and Policy Priorities, and the College Board reports that average state appropriations for higher education per $1,000 in personal income have declined from $9.74 in 1990 to $5.63 today,” Josh Freedman writes. This cut in public spending has led to an astounding forty-five percent average increase in tuition, room, and board over just the last ten years.

I find it hard to put public and private institutions on the same playing field. They play by totally separate rules in many respects besides the tax cuts. And to be perfectly honest, I hope that Congress rewrites that tax code on college endowments to give the numerous students who have no ability to pay for college at all a fair shot. Many consider education the great equalizer, but at the moment it isn’t equalizing very much because so many people are completely left out.