Using college endowments

Acollege degree is considered crucial for career success, yet American families are struggling to pay for higher education. Parents of newborns worry about college costs even as they buy diapers. Students are taking out high-interest loans that will saddle them with debt through middle age. The cost of tuition, fees, room and board -- adjusted for inflation -- has increased by double digits every five years over the last two decades, according to the College Board. Families and policymakers alike wonder why, when academia seems awash in cash, tuition increases are as predictable as the changing color of leaves in fall.

College endowments have enjoyed explosive growth. The wealthiest schools have bank accounts worth more than the gross domestic product of several small countries combined. Harvard University’s endowment grew 19.8% from 2006 to 2007, to $34.6 billion; Yale University’s endowment by 25%, to $22.5 billion; the University of Texas system by 18%, to $15.6 billion.

In all, 373 colleges had endowments of $100 million or more, according to the 2007 list from the National Assn. of College and University Business Officers. All but a handful of the 785 colleges on the list saw double-digit endowment growth from 2006 to 2007. California schools were well represented too: Stanford University (third highest in the nation with a $17.2-billion endowment, 21.9% growth from 2006 to 2007); the University of California ($6.4-billion endowment, 16.2% growth), USC ($3.7-billion endowment, 21.2% growth).

At a discussion I co-sponsored last month, I asked two dozen higher-education experts why colleges can’t draw on their bulging endowments to increase student aid or forgo tuition increases.

The experts had plenty of excuses for why colleges shouldn’t use these billions to offset tuition hikes. State-level budget cuts are pressuring public institutions to finance more of their own operations. Or, most alumni donations are restricted for specific uses. Or, the cost of educating a student is far greater than tuition, so colleges are already heavily subsidizing higher education.

Some of these points might be legitimate. Others are the equivalent of “the dog ate my homework.”

What’s the relationship between endowment size and student affordability? Hard to say. Some colleges have trouble explaining how tuition increases are related to operational costs and how those costs are determined. They appear to take their budget, divide by the number of students and offer the answer as their cost per student. One college president says tuition is $45,000 but the cost of educating a student is about $80,000 -- about the price of a new, well-equipped Corvette. Yet if I were to ask General Motors how much it costs to make a Corvette, I’m sure the company could tell me how much the tires, steering wheel and labor for assembly cost.

Of course, college kids aren’t parts on an assembly line. But colleges should challenge themselves to figure out component costs and curb them accordingly in favor of affordability.

Student affordability also seems to get lost in the shuffle as universities and donors decide how to direct donations. A 45-page report from the University of California system, “Annual Report on University Private Support, 2006-07,” describes generous donations used to build research centers and endow chairs for professors, yet it uses the phrase “financial aid” twice and “student aid” once.

I’m not singling out the UC system, which might be affordable enough. My question is whether universities nationwide are marshaling their financial resources to keep educational quality up and student costs down? Some colleges have openly admitted that they raise tuition steeply to attract applicants, saying applicants equate a high price with high quality. Other schools add rock-climbing walls to attract applicants. There always seems to be cash for a new arts center named for an alumni donor, a salary increase for the president or a new bronze turtle/bulldog statue from the class of 2006.

Why does Congress care about how colleges use their endowments? Because their growth is attributable, in part, to tax exemption. Colleges don’t pay federal income taxes on their operating income or their endowment investment income. Donations to colleges are tax deductible. Taxpayers pay for federal tax incentives to make higher education more accessible and affordable through college-savings plans and tax deductions for tuition and student-loan interest. Such tax credits and deductions cost U.S. taxpayers about $17 billion a year.

Universities are obligated to use this special tax status for maximum fulfillment of their charitable purpose of educating students. And Congress is obligated to make sure such tax policies are working as intended.

Since 1969, private foundations have been required by federal tax law to pay out 5% of their total assets each year. They argued against such a payout, claiming it would harm their growth. But private foundations are thriving and, in fact, give financial support to a lot of universities.

Unlike private foundations, universities continually bring in new money through aggressive fundraising. If education is a true national priority, so should be the endowment payout debate. Congress should determine whether tremendous endowment growth should trigger a mandatory payout of, say, 5% for endowments of $500 million or more, to make tuition more affordable.

I told the experts I gathered in Washington last month that I’m looking for self-correction. I want to see voluntary action on college affordability before I legislate a mandatory endowment payout. Some of them took that to mean they’re off the hook. They’re not. Legislation is a possibility, either from me or someone else. If universities want to stave that off, they need to offer more ways they can make education more affordable and fewer reasons why they can’t.

Charles E. Grassley, U.S. senator from Iowa, is ranking member of the Senate Committee on Finance, with jurisdiction over tax policy.