The U.S. Senate Finance Committee has proposed legislation that would require colleges to spend five percent of their endowments annually.
Universities, colleges and private foundations all receive a tax exemption; however, private foundations are required to spend five percent of their endowments annually to maintain this exemption while universities and colleges are not.
Even though tuition costs are rising faster than the rates of inflation and family income, the mandated five-percent solution is overly simplistic and may ultimately do more harm than good.
In a letter in response to a Finance Committee inquiry University President Lawrence Bacow explained some of the reasons why the spending requirement is unfeasible.
For one, college and university endowments are different from those of private foundations. "Colleges and universities entail substantial fixed costs that include faculty positions, libraries, dormitories and research laboratories," Bacow said in the letter. "Thus it is much harder to accelerate and decelerate spending in response to changing market conditions."
Furthermore, according to Bacow endowment funds are often earmarked for certain areas of spending by the donors themselves and cannot be shifted to reducing tuition costs and increasing financial aid without breaking contracts.
In a recent article in The Chronicle of Higher Education, Sandy Baum, the College Board and Skidmore College economist, was quoted saying that the recent financial aid changes made by Harvard University and Yale University because of the threat of a payment mandate were directed not at the neediest students but at families earning as much as $180,000 to $200,000. Terry W. Hartle, the lead lobbyist for the American Council on Education, explained how Yale's changes could have the perverse effect of forcing less-wealthy institutions to redirect their own resources toward competing with the top institutions for middle- and upper-income students.
For these reasons and more the mandated payouts appear to not be as beneficial to students as lawmakers would hope.
At the same time, however, Congress should be commended for looking into the use and investment of university endowments. Even if no legislation is passed, the attention paid to how colleges use their endowments to help students - particularly low-income students - is welcome.
The fact remains that tuition costs have ballooned while endowments and the salaries of university presidents have risen as well. Higher education is not big business and Sen. Chuck Grassley (R-Iowa) is right to note that "the purposes of colleges are teaching, education and research, and...the money ought to be used for that purpose and that college endowments should not be a storehouse of funds."
Tuition costs at Tufts have increased by $16,043 since 1999, a 52 percent increase. To its credit, Tufts has also worked to increase its tuition assistance as its endowment has increased. University spending on tuition assistance has more than doubled over the last ten years, increasing to $42 million this year.
Even so, the disproportionate rise in the cost of a college education relative to inflation and income growth places an unacceptable burden on students and their families. Colleges and universities should work to lower these costs immediately so that both present and future students can have access to an affordable education. For this reason, Congress should be applauded for investigating how endowments are spent but cautioned against wading in and oversimplifying a complicated process.
This article has been amended from its original version.
