President-elect Trump has proposed an education reformation agenda that puts the onus of student debt on university administrators. While the federal government must loosen costly regulations on higher education, colleges also have a responsibility to reduce tuition costs by tapping into their endowments and controlling spending, says Trump. Stakeholders in the education industry are concerned that drastic tuition discounting could present a financial burden to universities. But, the failure to apply university endowment funds towards financial aid for lower income students has come under scrutiny.
A House Ways and Means Oversight Subcommittee already considered this question of fair endowment spending practices in September with some of the industry’s leading experts. The event followed Congress’s formal inquiry into endowment spending earlier this year — a letter sent to the nation’s top higher education institutions asking that they consider their endowments and spending practices.
Developing a concrete answer to the question proved too difficult at the September hearing, as speakers tended to jostle back and forth between two extremes. Some lauded universities for providing substantial financial aid to students despite lower returns on investments, while others criticized institutions for hoarding their endowment funds and failing to sufficiently enroll students from low-income backgrounds.
As higher education policy hangs in the balance pending the actions of the president-elect, university administrators are going to have to assess their endowment practices more definitively. They will have to ask, based on their institution’s finances, whether they have actually been addressing rising tuition rates sufficiently. If the answer is no, what will they have to do to meet forthcoming demands from Congress?
Looking at the numbers
What was universally agreed upon by attending experts is the fact that the greatest concentration of endowment wealth rests in the hands of a select few elite institutions. These types of schools are largely accused of hoarding their money unnecessarily, instead of financing more scholarships.
The federal government has endowment data from approximately 1,600 nonprofit private universities. Only 102 of those maintain endowments over $500 million. Of those, only 56 — fewer than 4% — have endowments totaling over a billion dollars, according to Mark Schneider, vice president of the American Institutes for Research, who testified at the hearing.
This gap in endowment wealth, however, doesn’t necessarily mean that it’s easier for large universities to dole out more money from those funds, said Sandy Baum, a senior fellow at the Urban Institute and one of the hearing’s experts.
“These institutions are already giving huge amounts of financial aid. If you can get into Harvard, it’s free for people who earn up to 80,000 dollars a year,” said Baum.
“Another issue is that endowment funds are often restricted," she said. "If whoever gave the money says you have to, for instance, use it in scientific research, the funds must go to that. Plus, universities have to maintain the value of their endowments. Since funds are designed to last forever, you have to make them maintain their purchasing power.”
Even so, discount rates at private nonprofit colleges and universities appear to have risen every year since 2008, says Ken Redd, director of research and policy analysis at the National Association of College and University Business Officers.
“Last year, despite declines in investment gains, 78% of participants in the most recent NACUBO-Commonfund Study of Endowments reported spending more in dollars from their endowments,” said Redd. “Among the institutions that increased their dollar spending, the median increase was a substantial 8.8%, well above inflation. This finding suggests that schools spending from endowments has gone way up, and that cash is not being hoarded.”
He echoed Baum’s statement on restrictions within large university endowments.
“Spending at most endowments is governed by donor restrictions and schools’ spending policies. In fiscal year 2014, 90% of all new gifts to endowments were restricted for a particular purpose,” said Redd.“In addition, most schools have in place a policy of spending no more than 4% of their endowment funds to support campus operations.”
But many campus presidents and other executive officers often meet with donors to ask them if they will specifically donate to endowments for financial aid, he said.
The statistics show that tuition discounting rates have increased and universities appear to be spending no less than previous years from their endowments on financial aid, even though NACUBO reports that net tuition revenue growth estimates declined to 1.2 percent for freshmen in 2015-16 from last year’s 2.1 percent. Though net revenue increases couldn’t keep pace with the rate of inflation, universities are still offering more in institutional grants — creating a financial situation that is worrying many university administrators, especially as enrollment declines.
Yes, aid is increasing, but for whom?
Despite the data above, there is still a great deal of discontent over university endowments. But it’s not primarily around the way CBOs are handling those funds. Rather, a main concern is that even if universities dipped more extensively into their endowments, the funding probably wouldn’t go to that many more low-income students.
“Academic preparation is highly correlated with family income, so there are not that many people with low-income backgrounds that can get the preparation they need to go to these elite colleges,” said Baum.
“It’s difficult to get into Harvard. However, there are some low-income students that get in, but they often end up not knowing if they can afford it or feel that they might be out of place. So, we could do more to increase the number of low-income students at those schools, but it would still be a drop in a bucket compared to other students enrolled.”
While it’s true that universities are offering more in grant aid, says Schneider, it doesn’t mean it is equally distributed.
“Empirically, we found that 2013 compensation levels for a set of almost 400 presidents increased with the size of the endowment but declined with increases in Pell enrollment and was unrelated to six year graduation rates,” said Schneider in his congressional testimony.
Universities with large endowments that are tax exempt contribute to an unequal distribution of public subsidy to students in need of aid from primarily middle-income backgrounds, simply because these selective institutions maintain the largest concentration of wealth, he argues.
Only 13% of the students in universities with endowments between $5 and $10 billion are Pell recipients. At universities that are even wealthier, around 15% of students receive Pell grants, according to Schneider's data.
But, at the same time, institutions with endowments of $500 million or less maintain a percentage of Pell students comparable to that of public four-year colleges. Community colleges, receiving the lowest levels of government or endowment support, have the highest percentage of Pell students.
The unequal distribution of wealth in universities points to ineffective aligning of endowment management with greater public interest. Public subsidies from tax exemption on endowments are financing middle-to-higher income students, rather than moving low-income students to top-tier institutions, he argued.
“What are we trying to accomplish, improving access and student success for the poorer students or allow tax subsidies and endowments to primarily go to middle class students?” said Schneider in an interview. "That is an absolutely legitimate question. And it’s something that policymakers are debating when it comes to free college tuition. It’s something we need to know about when we consider where our subsidies go.”
Schneider recommends Congress reconsider tax exemption laws for large endowments and instead instructs institutions to invest more in services that would allow for greater number of low-income students to attend schools like Harvard.
But when it comes to top universities using endowments to address financial aid, Baum says that the root problem is more systemic. While it might be easy, as Trump suggests, for CBOs to more heavily dip into endowments, the reality is that universities can only address funding for low-income students if they enroll more of them.
“For a school like Harvard that provides very generous need-based financial aid, you’d say they’d could do a better job of enrolling low-income students,” said Baum.
“Ask yourself, how much of your aid is need-based and how much is it to get students who can afford to pay to choose your institution? Think hard about making sure financial aid really goes to students who need the money.”
Schneider likewise suggested institution officials actively widen their scope.
“Elite schools recruit from a very small number of high schools. They don’t cast their net very wide, and there’s research that shows that there is a lot of under placement going on.There’s a whole screening process that leads to low enrollment,” said Schneider in the interview.
Baum, though, also said the states ought to be increasing funding to public institutions to make sure students can better afford to attend without incurring severe debt.
“State funding at public institutions has declined significantly and that has caused tuition to go up, which makes students have to borrow more money. So more state funding for public institutions would be helpful in reducing tuition.”