Colleges sitting on big tax-free endowments while raising tuition prices are facing new pressures to spend more of their savings to keep tuition prices down. At a congressional roundtable held yesterday, one researcher raised the specter of taxing endowments to raise money for scholarships. And even if Congress restrains itself from raising taxes, students, parents, and donors are likely to pressure universities to spend more of their savings next year, when colleges finally have to start publishing just how much their rainy-day funds are earning and how much is going toward students.
Studies show the nation's colleges, which hold an overall total of more than $400 billion in donations and investment gains in tax-protected accounts, spend less than 5 percent of those hoards on financial aid or other campus improvements every year. Meanwhile, colleges have been raising tuition prices much faster than inflation.
At yesterday's roundtable, Sen. Charles Grassley, an Iowa Republican, and Rep. Peter Welch, a Vermont Democrat, hinted they wouldn't immediately pursue legislation that would require colleges to spend at least 5 percent of their endowments. But they called on colleges to do more to keep prices down. Congress appropriated $86 billion for financial aid. But every time we raise a dollar in financial aid, it gets burned up by tuition increases, Welch complained. If [tuition] keeps going up so people can't afford it, there will be a reaction, as more students get priced out of an education, he warned. This whole endowment issue is very much on the table. Our frustration is bipartisan.
One of those reactions could be attractive to a Congress struggling with deficits and demands for more college aid. Jane Gravelle, a senior specialist in economic policy for the Congressional Research Service, which is an arm of the Library of Congress, noted that alumni donations to colleges are tax deductible. In addition, colleges invest those donations very profitably and get to keep building up those profits tax free. Giving these tax breaks to colleges means taxpayers have to raise other money, she noted. So if taxpayers aren't happy with the way the endowments are being handled, they could raise taxes and have the government hand out more financial aid. The potential take: easily more than $5 billion a year. Perhaps more than $20 billion.
University officials, naturally, oppose both the minimum spending requirement and any new taxation. They say that the rich schools that have drawn the criticism are the exception. Only 76 of the nation's 4,300 colleges have more than $1 billion saved up and earn double-digit returns. The majority of colleges have less than $100 million, and most of their funds are invested conservatively, earning a comparatively low rate of return of less than 8 percent a year over the long term. So requiring poorer schools to spend 5 percent, at times (such as these) when inflation exceeds 3 percent, would mean those colleges would be eating into their rainy-day funds. And taxing endowments, especially those belonging to public universities, would reduce money for public education. That would seem to defeat the purpose, says Chris Bittman, chief investment officer of the University of Colorado Foundation.
There's no move afoot to begin taxing endowments currently. But university officials told the group they'll nevertheless be under increasing pressure to spend more of their endowments thanks to a new law that requires them to publicly report more about the way they handle and spend their investments. The new disclosures that will start next year may go a long way to creating pressure from alumni and students to force universities to start using more of their money to aid students, Michael Klausner, a Stanford law professor, told the roundtable yesterday.