In 2015, a New York Times op-ed acidly observed that Yale University had spent $480 million that year on fees for hedge fund managers to grow the university’s already massive endowment—while spending just $170 million on tuition assistance and fellowships for its students.
“We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” wrote law professor Victor Fleischer, whose 2006 proposal to change the tax treatment of “carried interest” became a liberal cause célèbre. “The private-equity folks get cash; students take out loans.”
Though Fleischer’s screed was not the first to attack elite college endowments—progressive commentator and former Clinton administration Secretary of Labor Robert Reich has also railed against them—it presaged a wave of criticism that has since become a storm. Shortly after Fleischer’s op-ed was published, New Yorker writer Malcolm Gladwell grabbed the baton, launching what’s become an ongoing, high-profile crusade against fat-cat university fund-raising. In 2016, he dedicated an entire podcast to the absurdity of billionaires donating millions in endowment dollars to schools that don’t need the money, and later waged a very public war against Stanford University for its fund-raising appeals to alumni. “If Stanford, with $22 billion in the bank, still has needy undergraduates, how are they spending the billions they ALREADY have?” he tweeted in February.
It’s not just liberals like Gladwell who are outraged. The GOP-led Congress has held at least two separate hearings examining the taxpayer subsidies that support endowments, which are now potentially under scrutiny as part of tax reform (assuming Congress gets there). Even Donald Trump has weighed in. “Many universities spend more on private equity fund managers than on tuition programs,” said then presidential candidate Trump last September, channeling Fleischer’s critique (albeit a little iffy on the details).
Observers of higher education have long known, of course, about the grotesque piles of cash the nation’s elite schools have been accumulating, as well as the glaring inequality between these schools and their poorer kin. According to a 2016 analysis by the Education Trust, 75 percent of the nation’s total college endowment wealth is held by less than 4 percent of phenomenally wealthy schools.
In addition to Yale, whose endowment was a whopping $25.4 billion in 2016, the holders of these outsized endowments include Harvard ($34.5 billion), Stanford ($22.4 billion), Princeton ($22.2 billion), and MIT ($13.2 billion), as well as top-tier state schools such as the University of Michigan ($9.7 billion) and the University of Virginia ($5.9 billion). In 2016, the fifty wealthiest universities in the country owned $331 billion in endowment wealth—a figure equal to roughly triple the size of California’s state budget last year and ten times that of Pennsylvania.Endowments are becoming a political target because they are increasingly (and rightly) seen as both a cause and a consequence of the growing inequities in higher education and the economy. One analysis finds that 75 percent of the nation’s total college endowment wealth is held by less than 4 percent of phenomenally wealthy schools.
The nation’s elite schools have long been politically sacrosanct—as have their tax-exempt endowments—but that may no longer be the case. The 2016 election gave vent to the anti-elite, anti-establishment populism that had been building on both the left and the right. It’s no shock, then, that the elite higher education establishment would become the inevitable target of these twin resentments—as the hoarders of privilege on the left and as purveyors of liberal indoctrination on the right. What’s happening now is a convergence of both liberal and conservative concerns about the size of university endowments, the extreme and growing inequality between rich schools and the rest, and the way in which the wealthiest universities are spending their endowments (or not). If Democrats can champion change without also reinforcing conservative hostility to academia, the result could be long-needed reforms that prompt—or force—America’s elite colleges and universities to spend more of their wealth on their intended mission: broadening educational and economic opportunities for more students.
Endowments have come under the microscope before—in 2008, Iowa Republican Senator Chuck Grassley and Montana Democratic Senator Max Baucus launched an inquiry into 136 colleges, asking them for details on their endowments and spending on student aid. When the financial crisis temporarily shrank university endowments, interest in the issue shrank too, and no legislation resulted.
But that’s changing. Last year New York Republican Representative Tom Reed began circulating a draft bill requiring schools with endowments larger than $1 billion to spend more money on tuition assistance for “working families” or face heavy penalties. Meanwhile, Democratic legislators in Connecticut introduced a bill in 2016 to tax the commercial property held by Yale, a measure proponents say would generate $65.2 million for the state. As of this writing, that proposal was still pending.
One indication that colleges are taking the threat to their endowments more seriously than they did in 2008 is the fact that they’ve ramped up K Street in their defense. In April 2017, Bloomberg reported that almost two dozen schools, including Princeton and Cornell, filed lobbying disclosure forms listing endowments as an issue.
Endowments are becoming a political target because they are increasingly (and rightly) seen as both a cause and a consequence of the growing inequities in higher education and the economy. Harvard raises orders of magnitude more money for its endowment than a typical college, not because it has, say, a superior alumni relations department. Rather, it’s because it recruits elite students, mostly from affluent backgrounds, who after graduation get recruited to big banks and consulting firms, who then become part of the .01 percent of Americans who earn a disproportionate share of the nation’s wealth, and who then gratefully write $1 million checks to their alma mater.
This self-reinforcing loop of privilege is then further accelerated by the U.S. tax code. One recently published analysis, by the Haas Institute at the University of California, Berkeley, calculates that the tax subsidies supporting college endowments totaled $19.6 billion in 2012. This includes the value of the tax exemptions provided to the universities themselves as well as the value of tax deductions to donors. This figure, moreover, includes the value of state and local tax breaks enjoyed by schools that use tax-exempt bonds to finance infrastructure projects rather than dipping directly into their endowments—a strategy known as “indirect tax arbitrage.” “It’s not like this is private money built up the old-fashioned way,” said Mark Schneider, vice president of the American Institutes for Research (AIR) and a longtime proponent of endowment reform.
Further compounding this inequality are various other government subsidies that schools receive. Counting the value of tax breaks given to schools and their donors, as well as direct federal support such as grants for research and work study (yes, elite schools get more of both these types of dollars), “private” schools such as Stanford and Princeton get far more government help than “public” universities and community colleges, despite the fact that public schools are the institutions far more likely to service the middle and working class. According to a 2015 analysis by AIR’s Schneider and Nexus Research, Stanford receives roughly $63,000 a year per student in direct and indirect public subsidies, while its in-state neighbor Cal State Fullerton receives just $4,000. “[W]hat justifies the high per-student government subsidies at the elite private universities, and the low per-student subsidies in public universities?” wrote Robert Reich, citing similar research. “There is no justification.”
Like liberals, conservatives say that they too are concerned about college affordability. “It is a disservice to the next generation of students that colleges continue to stock pile large sums of money that are tax exempt, and for which donors receive tax deductions, while tuition costs continue to rise,” said Representative Reed, a leading Trump supporter, in a statement accompanying his endowment reform legislation.
Elite universities argue that their endowments do indeed benefit students as well as provide vital support for research and university infrastructure. Harvard, for instance, noted in its response to Congress that it spent $175 million on undergraduate financial aid in 2015 and that just one in four of its graduates leaves with student debt.
That there is some truth to such a claim is reflected in the fact that Stanford, Harvard, and MIT are the top three schools on the Washington Monthly’s rankings of national universities, which measure schools in part on the net tuition they charge lower- and middle-income students, those students’ graduation rates, and how much they earn after leaving college. These schools do indeed offer spectacular educational opportunities at virtually no cost to students of modest means who are lucky enough to get in.
The problem is that very few such students ever get in.
Researchers at UC Berkeley’s Haas Institute, for example, found that elite schools have not expanded their admissions capacity, even as their endowments have ballooned. “Schools in the top 5 percent have maintained the same low levels of total undergraduate enrollment since 1990,” wrote Charlie Eaton, the study’s lead author.
Moreover, the vast majority of these limited slots are going to wealthy kids. Recent research from Stanford’s Raj Chetty and colleagues found that children from the top 1 percent of families by income were seventy-seven times more likely to go to an Ivy League school than children who grew up in the bottom fifth of families. Among the twelve schools the study dubbed the “Ivy League plus”—the eight Ivy League schools, together with the University of Chicago, MIT, Stanford, and Duke—just 3.8 percent of students came from the bottom 20 percent of families, while 14.5 percent were raised as one-percenters. At Harvard, more than 70 percent of the student body came from the top 20 percent of households, compared to only 3 percent from the bottom fifth.
Chetty also found that the share of poorer kids in elite schools hasn’t much improved over time. While the number of children from low-income families attending college rose during the 2000s, the vast majority of those children ended up at two-year colleges or for-profit schools; the share of these students at selective schools did not change much at all. Likewise, a separate analysis by the Education Trust found that nearly half of the schools with endowments of $500 million or more “enroll so few Pell Grant recipients that they are in the bottom 5 percent nationally.”
The bottom line, Chetty’s study concluded, is that access to elite colleges by low-income students has remained “largely unchanged.” “[T]here is substantial income segregation across colleges, with students from rich families predominantly attending some institutions while students from poor families attend others.”
The fact that conservatives have now joined liberals in wanting to do something about the gross inequities in college endowments could lead to a bright spot of progress in an otherwise dismal legislative landscape this year. But liberals should embrace this newfound conservative enthusiasm with some caution.
A particular worry is that the narrow issue of endowment reform will become engulfed in a broader attack against public support for higher education. That’s an outcome that the nation’s public colleges—the ones that don’t have big endowments, and few enough subsidies—can ill afford.
There are, unfortunately, some danger signs afoot, including a sudden rise in partisanship around the value of colleges and universities. A June 2017 poll by the Pew Research Center, for example, found that 58 percent of Republicans now say that colleges and universities have “a negative effect on the country,” up from 45 percent last year. By comparison, nearly three-quarters of Democrats see college positively.
Education also proved to be a fault line in the 2016 election, with stark divisions in the voting patterns of those who have a college degree and those who do not. While Trump’s staunchest supporters were the non-college vote—including 67 percent of non-college-educated whites and 51 percent of all voters with a high school education or less—Clinton was the favorite of educated elites, garnering 58 percent of voters with post-graduate degrees and just 28 percent of non-college-educated whites. In 2012, in contrast, it was GOP candidate Mitt Romney who won the majority of college graduates (by 51 percent), while Barack Obama won voters without a college degree (by exactly the same margin).
Education may be, in fact, the next cultural partisan divide, displacing old divisions over issues like gay marriage, which are receding in relative prominence. A defining trait of Trumpism is its anti-intellectualism—personified by Trump himself. And it’s no accident that the emergence of this educational-political gap coincides with a constant and concerted attack by conservative media on the nation’s colleges, under the guise of campus free speech, critiques of “political correctness,” and so on.
The risk is that conservatives use the legitimate case for endowment reform as the Trojan horse for its assault on higher education. One way to stop this from happening is for the nation’s elite universities to step up and reform themselves—by voluntarily using more of their endowment wealth to expand class sizes and grow the share of lower-income students they enroll. Schools argue that many of the donations they receive are earmarked for specific purposes by their wealthy donors. But that only means that they should work harder at steering donors away from vanity projects, and eschew college rankings metrics that encourage more spending on student perks such as food courts and lazy rivers instead of on more useful benefits such as lower tuitions and increased academic services. By taking on these reforms, elite institutions can help defang the coming assault on their status while creating the broader access to opportunity that Americans would like to see.One indication that colleges are taking the threat to their endowments seriously is the fact that they’ve ramped up K Street in their defense. In April 2017, Bloomberg reported that almost two dozen schools, including Princeton and Cornell, filed lobbying disclosure forms listing endowments as an issue.
Unfortunately, schools seem to prefer their accustomed defensive crouch, as evidenced by their lobbying push to preserve the status quo. That’s why liberals and conservatives should seize the current moment to work together on endowment reform legislation.
An excellent approach is the proposal offered up by AIR’s Mark Schneider and Jorge Klor de Alva, president of Nexus Research, which is narrowly targeted toward the class of schools that can easily afford to be more generous. In particular, Schneider and de Alva propose a relatively small (0.5 percent to 2 percent) federal excise tax on endowments over $500 million, which would be offset by the amount schools spend on financial aid. Moreover, the taxes would be earmarked for the support of public regional and community colleges.
“Our proposal lets colleges write off the money that goes to low-income students—and if they don’t do it, we tax them and transfer that money to community colleges, which is where we’re going to be getting the bulk of our workers in the future,” Schneider said.
Schneider and de Alva’s proposal would spare the vast majority of schools (most of which have endowments that are negligible by comparison, if they have one at all), create incentives for wealthy schools to do the right thing, and potentially expand funding for community colleges. Another advantage is that it would encourage more schools to spend, not hoard, their accumulating wealth. According to the Education Trust, many elite schools with large endowments spend less than 5 percent of their assets per year—the threshold spending requirement currently imposed on tax-exempt charitable foundations, but not on university endowments. The Education Trust’s analysis finds that bumping up the spend rate at the thirty-five wealthiest schools that did not meet this threshold in 2013 would generate an additional $418 million in potential financial aid funding.
What would make the Schneider–de Alva proposal even stronger is the addition of metrics to ensure that additional endowment spending is targeted at the bottom 80 percent of Americans, and that the share of these students at elite schools increases. Specifically, schools should be required to report the dollar amount and share of their endowment spending that goes toward financial aid, the share of such aid that goes to households in the bottom 80 percent, and the share of their student body that comes from lower-income households. And while Schneider and de Alva propose allowing schools to write off endowment funds that pay for financial aid for lower-income students, schools should also be allowed to write off funds spent on expanding class sizes—provided that these additional slots go to students from lower-income families. A sensible, narrowly tailored, and non-punitive plan for equitable endowment reform such as this could go a long way toward making access to an elite education a reality for greater numbers of deserving students.
In the era of Trump, many of America’s colleges pride themselves as the defenders of democracy, liberal values, and merit. But the best way to accomplish that mission might be to ensure that higher education itself retains its democratic commitment to opportunity. The first step is to take a hard look at how elite schools deploy the vast wealth at their command.