A Modest Proposal (University Finance Department)

Over at MajorGiftsGuru.com,
fundraiser Tom Wilson takes a stand in favor of requiring universities
to spend 5% of their endowment annually to maintain their tax-exempt
status.  The Nonprofiteer isn’t sure about applying a foundation-oid rule to one particular type of operating charity: if the goal is to require universities to hold tuition down, or spend more on scholarships, will this random-if-familiar percentage accomplish that the most effectively?  Or should we just make institutions with tuitions over $40,000 a year and endowments over $1 billion (to pick an equally random-if-familiar number) ineligible to participate in the Federal student loan program?

That’s a genuine question, not a recommendation.  But it’s a question reflecting the Nonprofiteer’s suspicion that two parallel stories dominating the recent press about higher education are about to merge: the story of wealthy institutions with enormous endowments which grow faster than their financial aid budgets (and the possibility of legislative action thereon), and the story of growing defaults and corruption in the student loan program. 

Even supporters of the program (of which she has long been one) can’t fail to grasp the loans’ role as the de facto floor under tuition calculations.  If universities couldn’t transfer x thousand dollars of their enormous operating expenses each year to the backs of liberal-arts majors and their parents, they’d have to find those x thousand dollars someplace else, or risk pricing themselves out of the market.  Where else?–well, my goodness, will you just look at the size of that endowment?

Now that we seem to be facing a meltdown in the student-loan market comparable to the collapse of sub-prime residential lending, we should also be facing the consequence of such a meltdown: a collapse in prices.  If that collapse in prices comes dressed as increased financial aid drawn from endowment, that’s fine; but why wouldn’t it be even better if the universities stopped waving around enormous price tags to begin with?  The
fact that Harvard’s tuition is $50,000 keeps poor kids from applying,
and the fact that it isn’t really $50,000 never gets
through.

If a university’s endowment income would pay its nominal tuition for its entire freshman class, why should the university charge tuition at all?  Imagine how our society would be transformed if every high school student in America knew that Harvard was free. 

THAT would be a major gift.

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5 Responses to “A Modest Proposal (University Finance Department)”

  1. Nonprofiteer Says:

    A commenter who wishes to remain anonymous writes, Dear Non-profiteer-

    I recently ran across your excellent blog because of my involvement
    in the local YMCA board. It’s terrific.

    I have a problem, however, with your (and Sen. Grassley’s) approach
    to university endowments. I think it’s called “granularity” these
    days. We used to think about it as seeing forests instead of trees.

    Frequently, gifts come with strings, i.e. “intent of the donor.” My
    impression is that the current trend at my university is that new
    money donors have very specific ideas about what the want their money
    to do, which typically is where their interests and the university’s
    intersect. The intent is built in to the letter of transmittal.

    Thus, while the endowment may be very large, the amount eligible for
    unspecified purposes, i.e. “general funds,” is typically a fraction
    of the total endowment. While I have no quarrel, in principle, with
    the idea of increasing the payout from university endowments, I think
    that it’s worth looking closely at how much would be available for
    student aid, before assuming that it would be a panacea.

  2. Nonprofiteer Says:

    You’re certainly correct that lots of university endowment money is committed to particular purposes–I didn’t mean to suggest it was all sitting there available for expenditure. But what I learned in my time in academe is that money is fungible. If the endowment is committed to supporting medical school faculty, say, then what otherwise would have been spent out of general revenue on those faculty salaries becomes available for student scholarships (say). And in a university environment, within some very broad limits, tuition waivers are free: once you’ve paid for a whole faculty, they can teach 15 students as readily as 10 (I realize this is heresy to college faculty, but I was an admissions officer.) So at least for tuition, the issue isn’t literally finding money in the endowment from which to write scholarship checks; it’s figuring out how much of the total operating expenses of the institution are already being paid for by endowment, determining how to cover the unpaid balance, and THEN considering how many students we can enable to take advantage of this already-functioning machine.

    In some ways, the worst impact of the student loan program is to turn tuition-waiver calculations of this kind into transactions involving actual money: there has to be a tuition payment for there to be a loan covering that payment. But there doesn’t [always] have to be a tuition payment for a wealthy institution to make its resources available to a deserving student.

    Obviously this is a complicated subject and I haven’t just exhausted it–but I wanted to make it clear I’m proposing a shift in our thinking about university resources, not just chortling merrily at the prospect of raiding somebody else’s piggy bank. (Not that there’s anything wrong with that!)

  3. Robert Tolmach Says:

    The best way to make tuition more affordable for all is not to lower the tuition for all — incliuding those who can afford it — but to make tuition more needs-based.

  4. Tom Cannon Says:

    That will take a sea change at Harvard: from prestigious eating club to the National flag ship university. Maybe the best way to do that is to have a national lottery in which every “qualified” Freshman applicant is assigned a number, draw all the numbers, start with the first number, go down the list until the class is filled and everyone else is on the waiting list. As people decide to go somewhere else, we continue down the list. Will this produce “The Best and The Brightest?” Maybe not; but maybe that’s not such a bad thing.

    Before I began in non-profits, I was in the Army for 21 years and city
    management for 12 years. Out of those experiences has come a quote from John W. Gardner that I believe sums up why non-profits are so important to this country:

    “I sometimes think that history might easily say about this nation: It was a great nation full of talented people with enormous energy who forgot that they needed one another.”

  5. Nonprofiteer Says:

    I wonder about the notion of people being able to “afford” tuition of $50,000 per year. Certainly people who can expend this without indebtedness should be asked to pony up–but what proportion of the population is that? Much smaller, I suspect, than the proportion of the Harvard (or Yale, or Grinnell) freshman class being asked to pay it.

    As for transforming Harvard and its fellow wealthy institutions from “prestigious eating club[s]” (wonderful notion!) to national universities: yes, that’s precisely the point. They are gatekeeper institutions, and they’re supposed to help allocate social goodies based on merit; so it’s important that we make sure they haven’t somehow become Berlin Wall guard-towers, securing the border between the good life and social immobility by announcing how expensive and difficult of access the good life really is. It’s really important that the people who are screened out by its processes are ONLY those who don’t have the capacity to benefit from what’s being offered.

    As for “the best and the brightest”–whether any university’s graduates can be described this way depends overwhelmingly not on who they were when they arrived but on what happens to them while they’re there.

    Let me reiterate: when I speak of “Harvard,” I mean all aspirational schools with resources that significantly outstrip their foreseeable future needs.

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