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On Thursday, the commissioner of the Internal Revenue Service's tax-exempt division told an audience at Georgetown University that the IRS would be looking into how colleges and universities spend (or don't spend) their endowments. (You can download his remarks here as a PDF.) Senator Charles Grassley (R - Iowa) and others have called for an investigation--and potentially regulation--of endowment spending by U.S. colleges and universities. Representative Peter Welch (D - Vermont) also amended HR 4137, a reauthorization of the Higher Education Act as the "College Opportunity and Affordability Act of 2007," to require "annual reporting by colleges and universities on how much of their endowment was paid out each year for the purpose of containing college costs." Welch also had proposed, but withdrew in February, an amendment that would have required colleges to withdraw at least 5 percent of their endowment each year and to use those funds to contain the cost of college for students.
But what is an endowment, exactly? Concordia University Wisconsin describes it thus:
An endowment is an amount of money (fund) that is given to the University with a stipulation that the funds are invested to earn annual interest rather than spent immediately.
The University of New Hampshire Foundation elaborates, telling us that an endowment is
a permanent source of income for University programs and/or departments. Gifts to an endowment are invested, with a percentage (currently 3.8%) of the income growth supporting a specific University purpose as directed by the donor(s). The remaining income (minus an administrative fee) is reinvested into the endowment, ensuring that the value of the investment grows forever.
In an ideal world, then, a college or university would grow its endowment through alumni and others' donations, as well as through strategic investments, and "live" off of a portion of the interest earned on that sum of money. You can imagine why it would be controversial in some circles to suggest that all colleges and universities withdraw from their endowments at a rate of 5 percent each year--especially at a time when many investments aren't offering a 5 percent rate of return. At the same time, some endowments are exceptionally large--Harvard's, the largest academic endowment in the world, sits at $34.9 billion--so it's pretty easy to level charges of "endowment hoarding."
In what may be a sign of a desire to regulate themselves rather than have Congress regulate them, wealthy colleges and universities across the nation are offering more generous financial aid packages, including some that entirely replace student loans with grants. This group includes liberal arts colleges--Williams, Swarthmore, Davidson, and Grinnell, for example--as well as universities such as Princeton and Stanford.
Daniel Brooks, a professor of supply-chain management at the W. P. Carey School of Business at Arizona State University, raises the issue of universities' tax-exempt status, comparing their spending to that of other nonprofit foundations:
Non-university foundations are required to spend at least 5% of their total value each year to retain their tax-exempt status. At issue is whether there should be a 'required payout' for university endowments, as well. These can be sizable amounts -- for Harvard, that would mean an annual payout approaching $2 billion. The universities with the largest endowments are spending less than the 5% per year required of non-university foundations. Some parents of students at some of these schools have asked why tuition remains so high if the endowments have, over the past decade of investment, created such wealth for the universities.
How does one spend an additional $2 billion a year? Based on my search for women bloggers writing on this issue, endowment spending doesn't seem to be a major concern of bloghers--or at least one that they feel qualified to comment upon. One notable exception: Margaret Soltan, an English professor at George Washington University, has written extensively on the subject at University Diaries, particularly regarding Harvard's endowment. In one post, she writes,
It's particularly disgusting for universities, centers of free thought about the values, insights, and behaviors that matter most to a culture, to represent grasping money-making machines, as Harvard does to more and more people. The striking thing about Harvard University, the talked-about thing, the thing much more notable than its professors and its libraries (which, as Tim points out, aren't as impressive as you might think given all that cash), is a degree of wealth unmatched by many nations of the world. What sort of power fantasy is Harvard
