Draft Legislation Targets University Endowments for Scholarship Support

January 8, 2016; Bloomberg BusinessWeek

Under a proposal being floated by U.S. Rep. Tom Reed (R-NY), colleges and universities with endowments over $1 billion would be required to dedicate 25 percent of their investment returns each year to student tuition support. Institutions failing to meet this standard would be penalized with an excise tax, and failure in three consecutive years would result in the endowment’s loss of its IRS tax exemption.

NPQ has reported on efforts to encourage or force wealthy universities to use their endowments to help their students pay the high costs of attending college. In addition to perceptions of warehousing billions of dollars, schools with billion-dollar endowments have been reported to pay their investment advisors millions of dollars annually. Compensation this high feels a lot more like Wall Street than it does academia.

Some elite private schools, like Harvard University, have programs to make college more affordable for students whose families earn incomes up to $150,000 (the group Reed’s proposed legislation is designed to benefit).

Programs like these supplement the traditional basket of scholarships, loans, grants, on-campus work-study jobs, and other internship and stipend opportunities available to many students. On many U.S. campuses, it’s difficult to find a student not benefitting from one or more of these programs, or who has not been able to negotiate a discount from their school’s “retail” price for annual tuition. In fact, one recent survey reports that private universities, on average, collect only 54 cents for each dollar of retail tuition. This “high price, high discount” approach to tuition in higher education looks a lot like the pricing strategies in U.S. healthcare, with an ever-widening gap between retail charges and negotiated discount payments from insurance companies and governments.

Reed’s proposal is concerning to some endowment advocates who worry that setting specific requirements for tuition support in law might place the “for good, for ever” vision of endowments at risk. In some years, there may be insufficient investment returns to pay its own administrative costs, increase endowment assets to account for inflation, and allow the endowment to support an institution’s basic needs. In fact, during and following the recent recession, some charitable endowments lobbied states to change their laws to allow trustees to spend an endowment’s principal in order to satisfy outstanding obligations, sometimes notwithstanding donor intent.

Reed reports that early reaction to his proposal has been “aggressive” and that he expects lobbying against his proposal to heat up as it moves from the proposal stage to legislation. There is little doubt that the issue touches a nerve for many people, but it’s less clear whether the idea will catch on in this form. One key indicator of the popularity of Reed’s proposal will be whether other members of Congress sign on as cosponsors. Regardless, the complex issues surrounding huge university endowments in the midst of high tuition and burgeoning student loan debt will continue to attract attention and ideas.—Michael Wyland