Let Endwments pay Tuition Costs

University Endowments

By 

Janet Lorin

 | Updated May 25, 2016 5:48 PM UTC

A not-so-old joke has it that Harvard is best thought of as a hedge fund with a university attached. The money in question is its endowment, a $37.6 billion pool made up largely of donations and retained earnings from investments. Big college endowments are a mostly American phenomenon, the product of a culture of philanthropy, rising inequality and aggressive investment techniques. Endowments also benefit from tax breaks for donors and a tax exemption on a fund’s earnings. Critics, including some members of Congress, are asking whether endowments are doing enough to help students at a time of soaring educational debt — or if the support by taxpayers is just helping the richest schools get richer.

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The Situation

Harvard isn’t the only school with lots of money. As of June 2015, the endowments of the 812 U.S. universities that responded to an industry survey amounted to $529 billion. Some 75 percent of that was held by the wealthiest 94 universities in the survey, which each had endowments of $1 billion or more. The average return on investment in the year ending June 2015 was 2.4 percent, compared with a 4.6 percent gain for the S&P 500 Index. Larger endowments showed the benefit of diversification, even with the unsteady financial markets: The one-year return for endowments under $25 million was 2.3 percent, while endowments over $1 billion returned 4.3 percent. In early 2016, the two most important tax-writing committees in Congress asked the richest 56 private schools to provide details about how their investment returns are spent and how much endowment fund managers are paid. One Congressional proposal would require schools with endowments over $1 billion to devote a quarter of their investment income to tuition relief for middle- and low-income students. In the U.K,Cambridge reported an endowment of ‎2.2 billion pounds ($3.2 billion), andOxford one of ‎2 billion pounds. Other schools with big endowments include the King Abdullah University of Science and Technology in Saudi Arabia and the National University of Singapore.

SOURCE: BLOOMBERG

The Background

Endowments have long played a central role in the rise of some colleges. A $17 million bequest in 1932 from George Eastman, the inventor and founder of Eastman Kodak, helped make the University of Rochester one of the nation’s richest for several decades. Donations of $100 million or more have come in a flurry in recent years, with about a dozen received by universities in 2014 and 2015. Endowments have also grown by adopting aggressive investment techniques. In 1985, 65 percent of Yale’s fund sat in U.S. equities; its asset allocation target for domestic stocks in fiscal 2016 is 4 percent. Its pioneering chief investment officer, David Swensen, described an endowment’s long time horizon as “well suited to exploit illiquid, less efficient markets.” Other universities followed suit, and returns rose. Then came the 2008 downturn, when the lack of liquidity contributed to some big losses. Harvard’s fund declined 27 percent. Today, some schools with big endowments and smaller student bodies, such as Princeton, Amherst and Grinnell, derive about half their operating budgets from endowment income.

SOURCE: YALE

The Argument

A Congressional Research Service report estimated that taxing endowments’ investment income at a 35 percent rate would have produced $16.2 billion in fiscal 2014, and that the cost of tax deductions claimed by individual and corporate donors to universities amounted to $6.3 billion per year. Both benefits flow largely to elite schools. One advocacy groupestimated that the $6 billion a year needed to fund President Barack Obama’s plan to make community college free could be raised by a sliding-scale excise tax of between 0.5 percent and 2 percent on endowments that exceed $500 million. Colleges counter that they can’t spend their funds like money in a bank account. Endowments are comprised of thousands of individual funds derived from gifts, and schools must by law follow the intention of the donors. The latest Congressional inquiry isn’t the first — the Senate Finance Committee raised similar questions before the financial crisis. Around the same time, about 30 of the nation’s richest schools replaced loans with grants in financial aid packages.

The Reference Shelf

• The yearly survey of endowments and investment returns by the National Association of College and University Business Officers.
• A Congressional Research Service report on endowments and tax options.
• Annual reports from the Harvard and Yale endowment managers.
• An American Institutes for Research study suggests taxing large endowments to support low-income students at public and community colleges.

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FIRST PUBLISHED FEB. 10, 2016

To contact the writer of this QuickTake:
Janet Lorin in New York at jlorin@bloomberg.net

To contact the editor responsible for this QuickTake:
John O'Neil at joneil18@bloomberg.net