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Colleges guard soaring endowments

Many resist congressional pressure to curb tuition hikes, offer more aid

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Globe Staff / February 28, 2008

Under growing pressure from Congress, the country's wealthiest colleges and universities are sharply resisting calls to spend more of their soaring endowments to expand financial aid and curb tuition hikes that critics say are putting college beyond the reach of ordinary families.

The pattern of deep-pocketed universities regularly raising tuition while amassing fast-growing fortunes has drawn unusual scrutiny from government leaders and higher education advocates over the past few months. They say elite colleges are hoarding wealth that could help open their doors to more poor and working-class families.

In Massachusetts, 13 institutions boast endowments of more than $500 million. The Boston area's eight wealthiest schools hold a combined fortune approaching $50 billion.

Through lobbyists and national education associations, colleges are fighting a handful of proposals rippling through Congress. Among the most controversial ideas: a requirement that schools spend 5 percent of their endowments each year to help defray costs for students and families.

"It's a terribly blunt instrument," said Larry Bacow, president of Tufts University, which has a $1.4 billion endowment.

Colleges say that only a small number of schools hold large reserves and that a uniform regulation of endowments would unduly penalize less-affluent schools.

The wave of new financial aid packages announced by top-tier colleges over the past three months is widely seen as an effort by the schools to head off action in Congress.

But lawmakers said they remain concerned about escalating costs, and they warn that colleges may have to spend more of their endowments, which are tax-exempt and financed by tax-exempt gifts, to justify their nonprofit status.

"Tuition has gone up, college presidents' salaries have gone up, and endowments continue to go up and up," Senator Chuck Grassley of Iowa, the ranking Republican on the Finance Committee, wrote in a letter to the colleges. "We need to start seeing tuition relief for families go up just as fast. It's fair to ask whether a college kid should have to wash dishes in the dining hall to pay his tuition when his college has a billion dollars in the bank."

US Representative Peter Welch, a Vermont Democrat who proposed the 5 percent requirement, said colleges must take immediate steps to rein in costs to avoid federal action.

"Every time we increase financial aid, it gets burned away by tuition increases, and students fall further behind," he said. "We need to send a clear message that this isn't sustainable."

Welch said Congress will continue to debate endowment spending over the coming weeks in hearings over the reauthorization of the Higher Education Act, the chief federal legislation governing colleges and universities. Other proposals would put schools that raise tuition more than their peers on a federal watch list and require schools to report how they spend endowments.

This week, 136 colleges across the country with endowments of $500 million or more are scheduled to respond to requests from the Senate Finance Committee for detailed information on their endowment and financial aid spending. The committee sought the information last month after the release of a national survey that showed explosive growth in college endowments, with 76 institutions surpassing the $1 billion mark, up from 39 in 2003.

Nowhere are colleges amassing more wealth than in the Boston area. Harvard University's $34 billion endowment is bigger than the gross domestic product of Montana. MIT's $10 billion cache could buy Facebook. Together, Boston College and Boston University could bankroll the entire city budget, with $500 million to spare.

Colleges use endowments to finance a range of priorities, including chaired professorships, capital improvements, and financial aid. The schools try to limit endowment spending to maintain a buffer to weather financial downturns and to ensure long-term stability.

They have spent proportionately less of their endowment for each of the past four years, a study by the National Association of College and University Business Officers found. They now spend an average of 4.6 percent each year, a figure that colleges say is carefully calculated to maintain the principal.

Proponents of more generous endowment spending say that concentration of wealth runs counter to colleges' legal status as nonprofits.

"They are allowed to collect and invest money tax-free and that should be done toward a public good," said Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity who testified before Congress on endowments last fall. "Hoarding isn't a public good. If the Gates Foundation was allowed to do this, there would be a great deal of suspicion."

College officials, who bristle at the prospect of government regulation, say endowment spending is largely restricted. Upward of 80 percent of their contributions are earmarked for specific uses, they say.

"That kind of intrusion wouldn't be healthy," said Robert Berdahl, president of the Association of American Universities and former chancellor of the University of California at Berkeley. "Endowments have to be dealt with conservatively, because the whole point of an endowment is to conserve."

In their defense, colleges note that financial aid has increased faster than tuition and that only well-off families are required to pay the full price. At some wealthy schools, families earning less than $60,000 a year are no longer required to pay anything, and a new Harvard initiative requires families earning $120,000 to $180,000 a year to pay no more than 10 percent of their income on average.

Other upper-tier colleges already provide generous financial aid packages for low-income and working-class families, and some college administrators say that increased financial aid would primarily benefit the wealthy.

"Our revenues from tuition are going down over time," said Kirk Kolenbrander, MIT's vice president for institute affairs.

Endowments have shown handsome returns. But that could quickly change, and spending to fulfill a mandated limit would be imprudent, officials said.

Among the vast majority of institutions with relatively modest endowments, financial aid budgets are already strained, and tuition increases are necessary, administrators add.

"Colleges are very reluctant to raise tuition," said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. ". . . They do it because they have to."

Still, some college administrators are sympathetic to congressional scrutiny, even if they oppose endowment restrictions.

"To me, the taxpayers are subsidizing these large endowments, and it's not irrational for Congress to question whether the beneficiaries are receiving a suitable payout," said Mark G. Yudof, chancellor of the University of Texas system.

Others criticize the discussion as a distraction. Focusing on schools with vast resources ignores the struggles of the bulk of the nation's students at public colleges, said John Lippincott, president of the Council for Advancement and Support of Education.

Anthony Marx, president of Amherst College, said wealthy colleges should be judged not only on how much financial aid they provide, but how many needy students they enroll.

"We need aid policies that ensure access, but that's not the end of the story," he said.

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