As college tuition continues to rise, some lawmakers and education advocates are calling on schools to spend more of their tax-exempt endowment funds on scholarships for low-income students. Those with endowments in the billion-dollar level are especially targeted by critics, who accuse school administrators of hoarding the endowment money.
To be sure, most higher education institutions are not in the billion-dollar endowment club with Harvard, Stanford or Duke, whose funds range from $7 billion to more than $37 billion.
Only 1.6 percent of schools fall in that category, according to the American Council on Education. The majority of public and private institutions, 84 percent, have endowments of less than $50 million.
That said, critics accuse colleges and universities of being too frugal when it comes to using endowment money to keep tuition down and help needy students. Schools spend an average of a little more than 4 percent of their endowment funds annually. That’s not enough says Andrew Nichols of the advocacy group Education Trust.
“We’re not asking them for 10 percent but just modest increases in spending can generate a lot of money because they have such healthy endowments and this money could in theory be used to help low income students,” Nichols said.
Nichols says even a 1 percent increase would make a big difference. He headed a study that looked at 138 schools with endowments over $500 million and says they found that only a few are spending more than 5 percent of those funds annually—a lot spend less. Private foundations are required to spend 5 percent of their asset values each year, but Nichols points out, colleges are exempt.
“A lot seem to be more concerned with preserving these funds for the long term instead of spending it for those who need it the most who are the low income,” Nichols said. “We think their number one priority should be helping students going there now.
But school administrators say they have to think long-term in managing endowments. Here’s Queens University CFO Matt Packey, who helps oversee the school’s $100 million endowment.
“The way an endowment works is you invest the money so it generates return earnings," Packey explained. “In your 401-K you invest that money and generate dividends, interest and returns on that money. In our case we spend that dividend and interest on scholarships but we leave the base alone so it remains forever.”
Packey says Queens’ endowment has 280 separate accounts, with about 65 percent of them restricted for specific uses. He says they spend the average amount of their endowment each year, with 70 percent going toward scholarships.
But Nichols and some congressional leaders think the schools have room to spend much more. In February, 56 schools with large endowments, including Duke and Wake Forest, received a letter from several House and Senate congressional Republicans, with a list of questions pertaining to their endowments.
Last year and this September, hearings were held on Capitol Hill out of concern that tuition continues to rise at colleges while the percentage of endowment spending is stagnate.
“Endowments aren’t generally used to lower tuition,” said Richard Vedder, an economist at Ohio University, testified before the House Ways and Means Committee last year. “Typically less than 20 cents of every dollar of endowment income is used for scholarships to lower fees for students. Making college more affordable is not the dominant use of endowment resources.”
Not true says Mike Schoenfeld, Duke University’s vice president for public affairs.
“The endowment is essential to keeping tuition down,” Schoenfeld said. “If you come to Duke as an undergraduate, the cost is about $90,000. The price we charge is about $60,000. How do you do that? A large chunk of that comes from the income from the endowment.”
Critics note that a lot of endowment money goes toward glitzy student centers, athletic fields and pricey academic buildings. Another reason some lawmakers are exploring an end or changes to endowments’ tax-exempt status, such as House Ways and Means Committee member Tom Reed, a Republican from New York.
“Harvard, $5.5 billion in returns-tax free last year. Texas gets a $3 billion return on endowment, tax free,” Reed pointed out. “To keep that tax free qualification, maybe we mandate their earnings, not principal, goes to tuition relief to students going there.”
But Queens University CFO Matt Packey said, “If that becomes taxable that becomes an extra burden on students. We then have to make up for that money somewhere else--increase the tuition and fees to make up for the fact that we’re paying taxes."
At issue for a lot of school administrators is fluctuating market returns. 2014 was a good year for endowments when returns were about 15 percent. But during the recession, officials at Duke say their endowment lost 25 percent of its value. And last year, UNC Charlotte’s $180 million endowment lost money says Beth Hardin, vice chancellor for business affairs.
“There have been some heady years and that’s drawn attention, but a year like fiscal year 2016 is the wakeup call because we lost money, $2.9 million, but we still have those students, faculty, programs and a library still being supported on the basis of our endowment assets,” Hardin said.
Ed Trust’s Andrew Nichols says endowment discussions and hearings are getting school’s attention. To address critics, he says there is something colleges can do now.
“Colleges and universities aren’t passive actors in the fund-raising business. What we want them to do is make low-income students a priority and request money from donors for that specific purpose. Unfortunately this doesn’t seem to be a priority for fundraisers. They are going after money in different types of buckets and not for low-income kids specifically,” Nichols said.
At Queen’s, CFO Packey says they have a $20 million donor gift that’s restricted for low-income students. Other local administrators pointed out that their capital campaigns and operating budgets also fund need-based financial aid.
But advocates for change might have an ally in President-Elect Trump. In the past, he’s said he wants to work with Congress to pressure schools with large endowments to spend more on financial aid or possibly lose their coveted tax-exempt status.