Commentaries
Politicians Eyeing Those Supersized University Endowments

By George Leef

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March 09, 2016

Recently some influential members of Congress complained about the supposed unfairness of colleges and universities who raised tuition at an excessive rate, despite their gigantic endowments.

Senator Orrin Hatch of Utah and Representatives Kevin Brady of Texas and Peter Roskam of Illinois wrote a letter on February 8 to the presidents of 56 private colleges and universities, who all hold endowments of more than $1 billion. In the letter, the Republican committee chairmen wrote, “Despite these large and growing endowments, many colleges and universities have raised tuition far in excess of inflation” and said they want to hear officials explain to their committees “how colleges and universities are using endowment assets to fulfill their charitable and educational purposes.”

The presidents have until April 1 to reply. It will be interesting to see how many defend against the letter’s implication that they don’t properly use their endowments as they keep increasing tuition.

Of course, the politicians don’t just want to satisfy their intellectual curiosity; they’re looking for a justification to change the law.

One politician who has concluded that no further information is necessary is Tom Reed, another Republican member of the House. He drafted a bill entitled the Reducing Excessive Debt and Unfair Costs of Education Act. The thrust of that bill (acronymically, REDUCE) mandates that colleges with endowments of $1 billion or more must use at least 25 percent of their earnings every year to lower the cost of attending for “working families,” which includes family incomes up to 600 percent of the federal poverty line. Schools that fail to comply would face penalties including the possible loss of tax-exempt status, which would severely hinder their fundraising.

If Reed’s bill became law, it would require significantly more federal micromanagement of higher education, and added compliance costs for the affected colleges and universities. Colleges already have to spend a lot to stay out of trouble with Education Department bureaucrats (as Norwich University’s Nick Cooper explained in this article).

And if it passed, schools with endowments approaching one billion might hold back from going over the $1 billion threshold.

Another way for colleges to minimize the impact of the law would be to curtail the number of lower-income students they accept. Many schools already prefer to enroll foreign students who can pay full tuition. Under the REDUCE Act, that preference would strengthen at the expense of lower-income Americans.

Putting aside concerns about the hidden costs and unforeseen consequences, Representative Reed stated, “We care about ensuring fairness in higher education and allowing every child to succeed without holding them back because of cost.”

But it is hard to see how such legislation—giving federal officials a role in deciding how universities use their endowment earnings—would actually do much to accomplish Rep. Reed’s goal.

The most obvious problem is that it would help only a tiny number of students, as congressional Democrats pointed out in their own “In the Red” program. Senator Patty Murray of Washington correctly stated that REDUCE “doesn’t affect very many students.” The colleges and universities that would have to comply enroll only a small fraction of America’s students, and numerous high-cost schools have endowments of less than $1 billion and would therefore be exempt.

One of the leading experts on the cost of higher education, Cornell’s Ronald Ehrenberg, said in this piece that it’s a “myth” that legislation like REDUCE “would lead to massive infusions of financial aid, and at most places that would not be the case.”

He is right. Among the twenty most expensive colleges in the U.S. (according to this 2015 list), half would not be subject to the bill’s mandate to reduce tuition for “lower income” students. Extremely costly schools such as Harvey Mudd College, Sarah Lawrence College, Oberlin College, Scripps College, and Trinity University have endowments of less than $1 billion, so they wouldn’t have to change anything.

Furthermore, the law’s benefits would extend to families that have pretty high incomes (600 percent of the federal poverty line for a family of four amounts to $145,500 in annual earnings) and may have substantial wealth and/or rich relatives. Requiring colleges to give financial aid to students who are not from struggling families will divert funds away from other uses that school officials regard as more pressing. It’s hard to see why the priorities of Washington politicians should override the priorities of college administrators who know their institutions intimately.

But the strongest objection to Congressional meddling with college and university endowment use is that it perpetuates the damaging idea that if a price seems “too high,” then the government should step in to fix the supposed problem. Instead of looking to grandstanding politicians to do something, it would be far better for individuals to simply avoid going to colleges that are too costly.

If a student from a “working class family” with an income of only around $100,000 can’t afford to enroll at a university costing $60,000 per year, the sensible thing to do is to enroll somewhere that is affordable. Overwhelmingly, that is exactly how they behave, solving the “unfair” cost problem on their own.

Although many Americans have been taken in by the “Chivas Regal effect” and believe that higher cost colleges are necessarily better than lower cost ones, it just isn’t true, as former York College president Robert Iosue explained in this Pope Center article. Students can get an excellent education at lower-priced schools, and might not get one at the priciest schools.

Perhaps an analogy to coffee will help make the point that we don’t need government intervention in college tuition.

Due to America’s increasing wealth, many places sell fancy coffee drinks that cost around $6, a price that would have staggered Americans in the recent past. But people who just want a basic cup of java can still get one for much less than $6. So far (to my knowledge), no politician has introduced a bill to mandate that Starbucks set different prices for their elite drinks based on the income of the customer. We assume that people who can’t afford the high-priced ones will buy something else.

It ought to be the same with colleges. We don’t need laws and regulations to create more arbitrary dividing lines that treat some people differently from others. If tuition is too high at a school like Sarah Lawrence College, don’t apply there. Instead, choose among the great many competing schools you can afford.

I doubt that any of the politicians who are so eager to show their “concern” over the high cost of some colleges will be deterred, but federal meddling with the way schools spend their endowments won’t do any good.

 


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