WASHINGTON — Universities with the largest endowments were slammed as “playgrounds for the children of the wealthiest” in a new Education Trust report today that says the institutions should tap their endowments at a higher rate to benefit more low-income students.
However, a representative from a college and university business officer association says the report “ignores fundamental basics” about college finance and endowment management.
The report — titled “A Glimpse Inside the Coffers: Endowment Spending at Wealthy Colleges and Universities” — takes aim at 138 institutions it dubs the “$500 million club” because each has more than $500 million in endowment assets.
“Nearly half of the members of the $500 million club enroll so few Pell Grant recipients that they are in the bottom 5 percent nationally,” the report states. “And nearly 4 in 5 of these wealthy institutions have an annual net price for low-income students that exceeds 60 percent of their annual family income.
“This effectively prices out many low-income students, funneling them to institutions that are less selective and have far fewer resources,” the report states.
The authors — Andrew Nichols, director of higher education research and data analytics at The Education Trust and José Luis Santos, vice president of higher education policy and practice at the organization — looked more closely at a select group of these institutions and suggest that they spend a full 5 percent of their endowments (instead of the current 4.6 to 4.9 percent) to enroll more low-income students or lower the price of attendance. The 5 percent figure is in line with what other tax-exempt organizations are legally required to spend from their endowments.
“Leaders at wealthy institutions typically say that endowment spending restrictions make these financial assets a difficult resource to leverage,” the report states. “But difficult doesn’t mean impossible.
“Granted, many donors restrict their financial gifts for specific purposes,” the report concedes. “However, despite what institutional leaders might have us believe, they are not powerless, passive actors when it comes to fundraising, receiving financial gifts, and determining how endowment funds are spent.”
The report notes how it comes at a time when policymakers are taking a closer look at how institutions of higher education are or aren’t spending their endowments to help low-income students.
To add to that discussion and make the financial aspect of their case, Nichols and Santos calculated how much additional revenue could be generated by increasing the endowment spending rate to 5 percent for 35 institutions that were below that threshold in 2013.
They assumed the low-income students, that is, those from families with incomes of $30,000 or less, would pay what their low-income peers currently pay at the institutions for a period of four years.
“If these 35 institutions increased their spending rates to 5 percent, that would generate an additional $418 million, which could pay the tuition for an additional 2,376 low-income students (if funds were unrestricted and entirely used for financial aid),” the report states. “This represents a nearly 67 percent increase in enrollment based on first-time, full-time low-income students enrolled in these institutions in 2012-13.”
The authors suggest that enrolling more low-income students isn’t the only way colleges and universities can put endowment money to better use.
“Endowment funds could also be used to lower the price these students pay, thus reducing the size of their eventual debt or need to work while enrolled,” the report states. “Given the current net price for low-income students at many of these institutions, this may be critical to attracting more low-income students.”
The report generated both praise and criticism among those who regularly deal with matters of college finance.
Among those who commend the report is Michael Dannenberg, director of strategic initiatives for policy at Education Reform Now and a former director of higher education and education finance policy at The Education Trust.
“There are thousands of non-profit foundations and charities — large and small — that are able to spend out at least five percent of their endowment each year and remain financially stable,” Dannenberg said. “Universities with $500 million plus endowments and team of financial advisors should be to do the same.”
However, critics of the report were easy to find.
Liz Clark, director of federal affairs at the National Association of College and University Business Officers, said the report “ignores fundamental basics about endowment management, tuition discounting, and college and university finance.”
“Institutions manage endowments to provide benefits for future students as well as today’s, which is reflected in their spending policy,” Clark said. “Endowment payout rates are set only after thoughtful deliberation to ensure annual payouts can meet needs even when market returns are small, or even negative.”
Clark said colleges and universities are “complex” and noted how endowments “usually support many other endeavors for the public good — from research to health care and other critical community and public service programs — on top of access and affordability for low-income students.”
(Coincidentally, on Wednesday NACUBO released a series of resources for people who deal with endowments, including “Endowment Management,” which is complimentary chapter from College and University Business Administration, a NACUBO reference on higher education management.)
Stephen J. MacCarthy, vice president of communications at the University of Pennsylvania — one of the institutions singled out in the report — complained to the Education Trust that the report misses several critical points and gives a distorted view of Penn’s commitment to low-income students.
“We think it is very unfortunate and misleading that you are choosing to single out our institution in your press release, particularly when Penn has a proven track record in investing its resources to enhance access to a high quality education,” MacCarthy wrote, noting that Penn had the third lowest net price in the report, one in which its low-income students pay just $222 more than the $3,625 recommended in the report.
MacCarthy noted how the report claims that “if Penn were to increase its rate by 1 percent, the university could generate an additional $64.62 million.”
“But this statement ignores the fact you highlight elsewhere in your report that many endowment units are, in fact, restricted,” MacCarthy wrote. “As a result, this number has no validity.”
MacCarthy found fault with how the report relies on the university’s non-profit tax returns — known as 990s — which he said lead to some “misleading conclusions” because the university operates an unincorporated hospital, which is included in the tax return.
“Therefore, the calculation that Penn spends 4 percent is misleading, because it includes hospital related endowments in the denominator which could not be used to support financial aid,” MacCarthy wrote. “If the hospital related endowments and associated spending were excluded from your calculations, Penn’s effective rate would be 5.1 percent — above the target you are advocating for in your report.”
MacCarthy also disputed the claim that most universities “could easily afford to do more to educate more low-income students now without compromising their futures.”
“That is an incorrect statement,” MacCarthy wrote. “Every dollar spent today means there will be fewer dollars to spend in the future.
“We are charged with finding an appropriate balance,” MacCarthy continued. “Saying that spending today has no impact on the future is simply not true.”
Jamaal Abdul-Alim can be reached at [email protected] or follow him on Twitter @dcwriter360.
