The last big move to regulate U.S. college endowments was thwarted by the financial crisis. While the values of many funds have reached new peaks, it remains to be seen how much traction the latest proposal will get.
Tom Reed, a Republican congressman from upstate New York, has drafted a bill that would mandate endowments over $1 billion pay 25 percent of their annual investment income to reduce costs for low- and middle-income students or lose their tax-exempt status if they didn’t comply for three years. No co-sponsors are attached to the proposal.
“This needs a lot more weight if you want to go after colleges than just one person,” said Mark Schneider, a vice president of the American Institutes for Research, a Washington-based nonprofit that evaluates social policies. “He doesn’t have the political weight to do this.”
High Cost
The cost of college has become a nearly universal complaint by parents, as the price of higher education has exceeded inflation for decades. Reed, whose high school senior daughter enters college next year, said he’s trying to help working families by using endowment money to defray college costs, which at some private schools exceeds $65,000 annually.
Reed wasn’t immediately available to comment on support for the proposal. His stab at reaping revenue from tax-free investments at endowments isn’t the first time the issue has come up. Most recently, David Camp, the now-retired former chairman of the House Ways and Means Committee, in 2014 proposed a 1 percent excise tax on the net investment income of universities with endowments that have at least $100,000 per student. The proposal was part of a larger tax bill that didn’t progress and Camp has since retired.
About 30 colleges in 2007 and 2008 announced they’d award grants instead of loans in financial aid packages. That was after Republican Sen. Chuck Grassley of Iowa, in a Senate Finance Committee hearing in September 2007, said he was concerned about endowment growth as college tuition continued to rise.
Gifts Restricted
In January 2008, Grassley and Max Baucus, then a Democratic senator from Montana and chairman of the Finance Committee, asked 136 colleges with endowments of $500 million or more a series of questions about their endowment payouts and student aid. Grassley raised the idea that college endowments should pay out 5 percent of their value each year, using the same rule as foundations. The idea didn’t proceed because endowments’ values sank with the rest of the market.
“My philosophy was that colleges that could afford to spend more on student aid should do it voluntarily and even permanently,” Grassley said in a statement on Friday. “Still, tuition generally isn’t going down, and student debt generally is going up.”
The amount of federal student debt has doubled since 2007 to more than $1.2 trillion and is expected to double again in the next decade, as students and their parents borrow for college and graduate school.
Colleges say spending endowment money can’t be compared to withdrawals from a bank account because the funds are accrued from thousands of individual agreements made by donors who often dictate how their gift should be spent.
Reed’s draft bill also tries to address this, stipulating that future donors to colleges with endowments of more than $1 billion must allot 25 percent of their gifts to the tuition relief grants, or they won’t be able to receive a tax deduction.
Legal Issues
The bill is asking colleges to spend money in ways they are forbidden to do, said Lawrence Bacow, the former president of Tufts University and a current member of the Harvard Corporation at Harvard University, whose $37.6 billion endowment is the wealthiest in higher education.
“I can’t see this going anywhere but you never know,” Bacow said. “There are huge legal problems in asking institutions to do this.”
Donors don’t like to be told that their gifts must be prescribed in certain ways.
“What they tend to care about most is what’s being done with their money,” Bacow said. “If somebody is endowing a chair in engineering, they’re not going to want to say, ‘Oh, I’m going to give 25 percent for financial aid.”’
Reed’s idea could create a conflict with state law, which governs how endowments and spending are managed, said Steven Bloom, director of federal relations for the American Council on Education, higher education’s chief trade group.
“It’s not surprising that politicians hear about the anxiety from their constituents about paying for college,” Bloom said. “Endowments aren’t the reason why tuition had gone up.”