May 29,2008

Grassley Outlines Interest in College Endowments, Student Aid, Addresses Colleges’ Concerns

The Chronicle of Higher Education

From the issue dated May 30, 2008


Wealthy Colleges Must Make Themselves More Affordable


We Americans have decided that the work of nonprofit colleges and universities is soinvaluable that they should be exempt from taxes. So John Doe pays taxes. John Deere paystaxes. But Johns Hopkins does not.

Those tax exemptions involve a social compact: In exchange, colleges are obliged tocarry out the charitable purpose of providing the best education to the most students at the lowestcost. That system works pretty well. College is more accessible to a greater number of studentsthan ever before.

Many colleges have seen unprecedented growth in their endowments in recent years,giving us the opportunity to see whether they can use some of the additional money to help evenmore students afford a quality education. For example, Harvard's $34.6-billion endowment, asreported in a recent study by the National Association of College and University BusinessOfficers, is roughly equal to the combined gross domestic products of the Bahamas, Barbados,Burundi, Mauritania, Somalia, and Zimbabwe. Yale University has an endowment of$22.5-billion, and Princeton has one of $15.8-billion. Beyond the Ivy League, dozens of otherhigher-education institutions have reached the billion-dollar mark. Pomona College's endowmentis $1.8-billion. Yeshiva University's is $1.4-billion. Texas Christian University's is $1.2-billion.The list goes on.

Of course, such collegiate wealth is attracting attention. Some Massachusetts legislatorsrecently floated the idea of enacting an annual tax of 2.5 percent on endowments that exceed$1-billion.

I don't want to tax colleges. But I do want to know more about how they are maximizingtheir tax-exempt status to fulfill their charitable mission of educating students.

Parents and students are anxious about college prices. Increasingly, parents of newbornsare opening college savings accounts if they can afford to and worrying if they can't. Studentsfrom low-income families fear they won't be able to afford college, some so much that they don'teven apply. Recent graduates describe pressure to find high-paying jobs not out of passion forthe field but to pay off the high-interest loans that they took out to get the best education.Those concerns have sparked questions by the U.S. Senate Finance Committee, where Iserve as ranking member, about why wealthy colleges aren't spending more endowment moneyon student aid. Last fall we held a hearing at which two witnesses described stratosphericendowment growth. After that and further scrutiny by members of Congress, educationwatchdogs, and the news media, a series of top colleges announced enhanced student-aidpackages.

Those are welcome developments, but they involve only a dozen or so institutions. Couldand should those institutions do even more? How are the dozens of other well-financedinstitutions using their financial success to help students afford college?

In January, Max Baucus, chairman of the Senate Finance Committee, and I wrote to the136 colleges with endowments of $500-million or more about their endowment payouts andstudent aid. We've collected the responses. We'll analyze that information and use it to continuethe discussion about how to make college more affordable. Legislation to require the wealthiestinstitutions to have an annual 5-percent endowment payout remains a possibility, as doesincreased reporting about endowment performance and expenditures.

It's clear that the details of endowment and spending are hard to come by and of keeninterest to members of Congress and even colleges themselves. Early on, a staff member in theinvestment office of a well-financed college called us to request all of the institutions' responsesas soon as possible. He said his college was eager to see what the others were doing.Other college officials are nervous about the increased interest and have expressed concerns,including these:

A 5-percent payout requirement is too prescriptive. But private foundations are subject toa 5-percent payout requirement, and they're thriving. Colleges argue that foundations exist todisburse their funds, while endowments have to support their institutions in perpetuity. Of coursehigher-education institutions need financial resources for future operations and capitalinvestments. But foundation funds are usually fixed, while colleges receive new donations all thetime. Isn't it just easier for some colleges to raise tuition and amass endowments than to look forways to cut costs or pay out more to help current students?

Most donations to colleges are restricted and can't be spent on student aid. That is achicken-and-egg argument. Are donor funds restricted because donors impose restrictions orbecause colleges solicit donations for specific purposes? For example, many colleges askundergraduates to call alumni to solicit donations. It would be difficult to say no to an earnestyoung student seeking donations for any purpose. It would be nearly impossible to say no to anearnest young student seeking donations for need-based scholarships. If colleges need money tohelp poor kids attend, surely donors will respond and suspend dreams of an eponymous fountainon the quad.

And even when donations are restricted, don't some colleges cite excessive restrictions asan excuse to hoard rather than spend the money? Say a donor wanted his million dollars used formusic appreciation. The institution could offer scholarships for low-income music majors. As wesay in the nation's capital, money is fungible.

Getting wealthy universities to spend more to help middle-income families pay forcollege will hurt low-income families. The idea is that wealthy colleges can afford generousstudent aid for middle-income families, allowing them to siphon away those students fromless-affluent institutions - which will then also have to offer more aid to middle-income familiesto compete. That, in turn, will divert aid money away from the low-income students who trulyneed it. I look forward to hearing colleges flesh out that argument. Right now, it seems to me thatlowering the affordability barrier would raise the aspirations and academic achievements of moreand more applicants, broadening the pool of good students from all socioeconomic backgrounds.

College finances are complex; Congress doesn't understand. Some institutions seem tomake their finances - including tuition policies, student-aid options, and endowment-spendingrates - opaque for students, parents, and Congress alike. The Senate Finance Committee shouldhave a complete picture before considering legislative changes. That's why Chairman Baucusand I wrote to the colleges with the largest endowments: to give them an opportunity to describehow they use their endowments and why, and how they distribute and publicize student aid.When we analyze the responses, we will proceed deliberately.

Meanwhile, tuition may be inflated in the first place. Some colleges openly admit to steeptuition increases to attract applicants and compete with rival institutions, not necessarily to keepup with real costs. They say applicants equate a high price with quality.

Because of the attention to endowments, there's a renewed discussion among parents,students, donors, and trustees about skyrocketing tuition. I invite more questioning and analysisof pricing and affordability.

Congress is engaged in a power grab and meddling in an area that's none of its business.Or, as a former University of Texas regent put it, "What gives the federal government the rightto, in Texas terms, put their cotton-pickin' hands on our money?"

The federal treasury forgoes billions of dollars from tax-exempt entities, includingcolleges. Not only are higher-education institutions exempt from federal taxes, but theirendowments are tax-free, and donations to them are tax-deductible. Part of the recent endowmentspike came from the aggressive use of off-shore tax-avoidance strategies. Taxpayers pay forfederal tax incentives to make higher education more accessible and affordable through 529college-savings plans, a deduction for taxpayers filing jointly of up to $4,000 for tuition(depending on income), and the tax deductibility of interest on student loans.

Such favorable tax treatment came through Congress, specifically through the SenateFinance Committee. Congress has an obligation to make sure those tax policies are working asintended.

Charles E. Grassley, a U.S. senator from Iowa, is the top Republican on the Senate FinanceCommittee.

Section: Commentary
Volume 54, Issue 38, Page A36