In 2015, a New York Times op-ed observed that Yale University had spent $480 million that year on fees for hedge-fund managers to grow the university’s already massive endowment—while spending just $170 million on tuition assistance and fellowships for its students.

“We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” wrote the law professor Victor Fleischer, whose 2006 proposal to change the tax treatment of “carried interest” became a liberal cause célèbre. “The private-equity folks get cash; students take out loans.”

Though Fleischer’s screed was not the first to attack elite-college endowments—the progressive commentator and former Clinton administration Labor Secretary Robert Reich has also railed against them—it presaged a wave of criticism that has since become a storm. Shortly after Fleischer’s op-ed was published, the New Yorker writer Malcolm Gladwell grabbed the baton, launching what’s become an ongoing, high-profile crusade against fat-cat university fundraising. In 2016, he dedicated an entire podcast to the absurdity of billionaires donating millions in endowment dollars to schools that don’t need the money, and later waged a very public war against Stanford University for its fundraising appeals to alumni. “If Stanford, with $22 billion in the bank, still has needy undergraduates, how are they spending the billions they ALREADY have?” he tweeted in February.

It’s not just liberals like Gladwell who are outraged. The GOP-led Congress has held at least two separate hearings examining the taxpayer subsidies that support endowments, which are now potentially under scrutiny as part of tax reform (assuming Congress gets there). Even Donald Trump has weighed in. “Many universities spend more on private equity-fund managers than on tuition programs,” the then-presidential candidate last September, channeling Fleischer’s critique.

Observers of higher education have long known about the cash the nation’s elite schools have been accumulating, as well as the glaring inequality between these schools and their less-affluent kin. According to a 2016 analysis by the Education Trust, a nonprofit group that advocates for closing the achievement gap, 75 percent of the nation’s total college-endowment wealth was held by less than 4 percent of phenomenally wealthy schools as of 2013.

In addition to Yale, whose endowment was $25.4 billion in 2016, the holders of huge endowments include Harvard ($34.5 billion), Stanford ($22.4 billion), Princeton ($22.2 billion), and MIT ($13.2 billion), as well as top-tier state schools such as the University of Michigan ($9.7 billion) and the University of Virginia ($5.9 billion), according to 2016 data. In 2016, the 50 wealthiest universities in the country owned $331 billion in endowment wealth—a figure equal to roughly triple the size of California’s state budget last year and ten times that of Pennsylvania.

These wealthy institutions emphasize that they rely on the endowments for expenses that are critical to students’ education—campus facilities, for example. Many also dedicate a sizable portion of their endowments to student aid. But that spending ultimately benefits a relatively small population of students, and the institutions have faced growing criticism for not using the endowments to meaningfully increase the number of low-income students they serve.

The nation’s elite schools have traditionally been politically sacrosanct—as have their tax-exempt endowments—but that may no longer be the case. The 2016 election gave vent to the anti-elite, anti-establishment populism that had been building on both the left and the right. The elite higher-education establishment became the inevitable target of these twin resentments—as the hoarders of privilege on the left and as purveyors of liberal indoctrination on the right. What’s happening now is a convergence of both liberal and conservative concerns about the size of university endowments, the extreme and growing inequality between rich schools and the rest, and the way in which the wealthiest universities are spending their endowments (or not). The result could be reforms that prompt—or force—America’s elite colleges and universities to spend more of their wealth on  broadening educational and economic opportunities for more students.

Endowments came under scrutiny in 2008, when Iowa Republican Senator Chuck Grassley and Montana Democratic Senator Max Baucus launched an inquiry into 136 colleges, asking them for details on their endowments and spending on student aid. When the financial crisis temporarily shrank university endowments, interest in the issue shrank, too, and no legislation resulted.

But that’s changing. Last year New York Republican Representative Tom Reed began circulating a draft bill requiring schools with endowments larger than $1 billion to spend more money on tuition assistance for “working families” or face heavy penalties. Meanwhile, Democratic legislators introduced a bill before the Connecticut General Assembly in 2016 to tax the commercial property held by Yale, a measure proponents say would generate $65.2 million for the state; the bill died on the senate calendar.

One indication that colleges are taking the threat to their endowments more seriously than they did in 2008 is the fact that they’ve ramped up K Street in their defense. In April 2017, Bloomberg reported that almost two dozen schools, including Princeton and Cornell, filed lobbying disclosure forms listing endowments as an issue.

Endowments are becoming a political target because they are increasingly seen as both a cause and a consequence of the growing inequities in higher education and the economy. Harvard raises orders of magnitude more money for its endowment than a typical college in part because it enrolls lots of affluent students who after graduation get recruited to lucrative jobs and are able to write pricey checks to their alma mater.

This self-reinforcing loop of wealth is further accelerated by the U.S. tax code. One recently published analysis, by the Haas Institute at the University of California, Berkeley, calculates that the tax subsidies supporting college endowments totaled $19.6 billion in 2012. This includes the value of the tax exemptions provided to the universities themselves as well as the value of tax deductions to donors. This figure, moreover, includes the value of state and local tax breaks available to schools that use tax-exempt bonds to finance infrastructure projects rather than dipping directly into their endowments—a strategy known as “indirect tax arbitrage.” “It’s not like this is private money built up the old-fashioned way,” said Mark Schneider, the vice president of the American Institutes for Research (AIR) and a longtime proponent of endowment reform.

Further compounding this loop are various other government subsidies that schools receive. Counting the value of tax breaks given to schools and their donors, as well as direct federal support such as grants for research and work study ( elite schools get more of both these types of dollars), private schools such as Stanford and Princeton get far more government help than public universities and community colleges, the latter of which are more likely to service the middle-and-working class. According to a 2015 analysis by AIR’s Schneider and Nexus Research, in 2013 Stanford received roughly $63,000 a year per student in direct and indirect public subsidies, while its in-state neighbor Cal State Fullerton received just $4,000 per student.

Liberals and conservatives alike are concerned about college affordability. “It is a disservice to the next generation of students that colleges continue to stockpile large sums of money that are tax-exempt, and for which donors receive tax deductions, while tuition costs continue to rise,” said Representative Reed, a leading Trump supporter, in a statement accompanying his endowment-reform legislation.

Elite universities argue that their endowments benefit students as well as provide vital support for research and university infrastructure. Harvard, for instance, noted in its response to Congress that it spent $175 million on undergraduate financial aid in 2015 and that just one in four of its graduates leaves with student debt.

It’s worth noting that Stanford, Harvard, and MIT are the top three schools on the Washington Monthly’s rankings of national universities, which measure schools in part on the net tuition they charge lower- and middle-income students, those students’ graduation rates, and how much they earn after leaving college. (The Washington Monthly produced this story in partnership with The Atlantic.) These schools offer spectacular educational opportunities at virtually no cost to students of modest means who get in.

But very few such students ever get in.

Researchers at UC Berkeley’s Haas Institute, for example, found that elite schools have not expanded their admissions capacity, even as their endowments have ballooned. “Schools in the top 5 percent have maintained the same low levels of total undergraduate enrollment since 1990,” wrote Charlie Eaton, the study’s lead author.

Moreover, the vast majority of these limited slots are going to wealthy students. Recent research from Stanford’s Raj Chetty and colleagues based on data from 1999 to 2013 found that children from the top 1 percent of families by income were 77 times more likely to go to an Ivy League school than children who grew up in the bottom fifth of families. Among the 12 schools the study dubbed the “Ivy League plus”—the eight Ivy League schools, together with the University of Chicago, MIT, Stanford, and Duke—just 3.8 percent of students came from the bottom 20 percent of families, while 14.5 percent were raised as 1-percenters. At Harvard, more than 70 percent of the student body in the cohorts studied came from the top 20 percent of households, compared to only 3 percent from the bottom fifth.

Chetty also found that the share of poorer kids in elite schools hasn’t much improved over time. While the number of children from low-income families attending college rose during the 2000s, the vast majority of those children ended up at two-year colleges or for-profit schools; the share of these students at selective schools did not change much at all. Likewise, a separate analysis by the Education Trust found that nearly half of the schools with endowments of $500 million or more “enroll so few Pell Grant recipients that they are in the bottom 5 percent nationally.”

The bottom line, Chetty’s study concluded, is that access to elite colleges by low-income students has remained “largely unchanged.” “[T]here is substantial income segregation across colleges, with students from rich families predominantly attending certain institutions while students from poor families attend others.”

The fact that there’s a bipartisan desire to do something about the inequities in college endowments could signal legislative progress on the issue. But some endowment-reform advocates worry the narrow issue of endowment reform will become engulfed in a broader attack against public support for higher education. A June 2017 poll by the Pew Research Center found that 58 percent of Republicans now say that colleges and universities have “a negative effect on the country,” up from 45 percent last year. (Nineteen percent of Democrats had negative views of colleges and universities, which has little changed from recent years. ) In particular, the growing skepticism of colleges and universities threatens public colleges—the ones that don’t have big endowments, and have limited access to subsidies.

One way the nation’s elite colleges and universities can avoid a broader effort at reform is to step up and reform themselves—by voluntarily using more of their endowment wealth to expand class sizes and grow the share of lower-income students they enroll. Schools argue that many of the donations they receive are earmarked for specific purposes by their wealthy donors. But advocates of endowment reform point out that schools can steer donors away from vanity projects, and eschew college-rankings metrics that encourage more spending on student perks such as food courts and lazy rivers instead of on lower tuitions and increased academic services.

AIR’s Mark Schneider and Jorge Klor de Alva, president of Nexus Research, have advanced a legislative proposal that is narrowly targeted toward the class of schools that they say can easily afford to be more generous: a 0.5 percent to 2 percent federal excise tax on endowments over $500 million, which would be offset by the amount schools spend on financial aid. Moreover, the taxes would be earmarked for the support of public regional and community colleges.

“Our proposal lets colleges write off the money that goes to low-income students—and if they don’t do it, we tax them and transfer that money to community colleges, which is where we’re going to be getting the bulk of our workers in the future,” Schneider said.

Schneider and de Alva’s proposal would spare the vast majority of schools (most of which have much smaller endowments, if they have one at all), create incentives for wealthy schools to commit funds to low-income students, and potentially expand funding for community colleges. Another advantage is that it would encourage more schools to spend, not put aside, their accumulating wealth. According to the Education Trust, many elite schools with large endowments spend less than 5 percent of their assets per year—the threshold spending requirement currently imposed on tax-exempt charitable foundations, but not on university endowments. The Education Trust’s analysis finds that bumping up the spend rate at the 35 wealthiest schools that did not meet this threshold in 2013 would generate an additional $418 million in potential financial-aid funding.

In the current political climate, many of America’s colleges pride themselves as the defenders of democracy, liberal values, and merit. But the best way to accomplish that mission might be to ensure that higher education itself retains its democratic commitment to opportunity. The first step is to take a hard look at how elite schools deploy the vast wealth at their command.


This post appears courtesy of Washington Monthly.