Draft Legislation Targets University Endowments for Scholarship Support

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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

  • Third Sector Radio USA

    Seems to me this is another right-wing politician deflecting the issue of how to fund education. Reducing the corpus of endowments places the burden of educational costs even more heavily on higher ed institutions, many of which already are not able to meet the true (retail) cost of education.

    Willie Loman bank robber of yore, knew where the money was. We currently have mega-corporations–making billions in profits–demanding well-educated employees but unwilling to share in the cost of that education, either directly or through tax payments.

    Education does have many social benefits. Rather than relying on the nonprofit sector to sacrifice even more for the welfare of society, perhaps we should look at the big picture and encourage fair participation?

    • Ironically, many of those advocating for increased endowment support of tuition are people on the political left who are outraged at the warehousing of money by endowments and advocate for financial help for students – now. There are also libertarians and “Main Street” (as opposed to “Wall Street”) Republicans who are offended by both large university endowments and high retail prices for higher education.

      BTW, the bank robber of yore you refer to is Willie Sutton. Willy Loman was the protagonist in Arthur Miller’s “Death of a Salesman”.

      • Third Sector Radio USA

        Oops. Thanks for the correction.

  • Tim

    Seems like the bill would do a good job on its own removing a college’s “tax exemption.” After colleges, why not move on to museums? Then performing arts venues…etc….Ugh!!!