A basic objective of all universities in the United States is to educate young minds. An educated citizenry benefits our nation as a whole and this explains why most universities today are considered to be non-profit organizations. Because of their non-profit status, universities typically are tax-exempt.
Although the logic behind exempting organizations that provide a public service by disseminating knowledge is clear, this clarity is muddied by two unpleasant practical details that loom large in everyday life. First, the cost of attending college has been rising faster than inflation for several decades. Second, many universities now are quite wealthy, with about 100 of them possessing endowments in excess of $1 billion.
When these two practical details are looked at in the context of the skill-biased technological change that has occurred and is continuing to occur in the U.S. economy, it is increasingly obvious that in order to have a decent career that provides for the financial security not only of an individual but also his or her family, it does not make sense to stop one’s education after high school. Put differently, in order to be financially secure, it is increasingly necessary to obtain, at least, a college education.
However, because wage growth simply has not kept up with the growth rate of college tuition, disproportionate numbers of low- and middle-income Americans are being priced out of a college education, particularly at the most sought after institutions—think Ivy League schools—which also happen to be the most expensive. This state of affairs cannot continue indefinitely, because if it does, American society will essentially become a “winner take all” society.
To address this insalubrious situation, U.S. Rep. Tom Reed, R-Corning, plans to introduce a bill that will directly address the skyrocketing cost of attending college. The basic idea in Reed’s bill is simple: Universities with endowments in excess of $1 billion would be required to spend 25 percent of their annual endowment income on financial aid for low- and middle-income students. If these institutions fail to do so, then after a period of time they will be in line to lose their tax-exempt status.
Although many details—such as the exact mandated spending proportion, the dependence of a college’s operating budget on its endowment, and the nature of the penalty enforcement mechanism—need to be worked out, it is important to bear in mind that this proposed bill applies only to the wealthiest universities and not to all institutions.
In recent times, some wealthy universities have increased the amount of money they spend on student financial aid, but there is no gainsaying the fact that many of them could do a lot more. To see why, consider the staggering amounts involved in the following examples provided recently by professor Victor Fleischer of the University of San Diego. In 2014, Yale University paid about $480 million to the private-equity fund managers hired to manage the university’s endowment. In contrast, of the $1 billion the endowment contributed to Yale’s operating budget, only about $170 million was allocated for tuition assistance, fellowships and prizes.
Lest the reader think that Yale’s situation is exceptional, Fleischer points out that endowment managers hired by Harvard, Princeton, Stanford and the University of Texas all received more in compensation than did the unfortunate students.
So, the general idea that wealthy universities should not be allowed to accumulate cash and that they should be required to spend a certain percentage of their endowment on student aid is a serious one and it deserves careful scrutiny. Surely, we do not want to support a state of affairs in which fund managers, and not students, are the principal beneficiaries of university endowments.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.
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