When To Break The Piggy Bank

Last year Public Agenda discovered that 52 percent of Americans believe that colleges are run mostly like a business with their eye on the bottom line rather than mainly caring about education. It would be hard to make that argument for a school such as Berea College, in Berea, Ky., which accepts only students from low-income families and charges no tuition. There is no football team to root for, no glass and steel recreation center to work out at, and there are no climbing walls to scale. Yet 85 percent of the applicants who are accepted attend. What would you give up to go to a school that costs nothing?

Berea makes ends meet by putting the students to work and forgoing many of the resort-like amenities of big schools that charge big money. They are also gifted with a $1 billion endowment which helps pay the bills. A billion is a lot, but it is dwarfed by the endowments of many other schools.

In an article in Monday’s New York Times, Tamar Lewin reports that the public is increasingly suspicious of schools with enormous endowments. With coffers like Harvard’s of $35 billion some believe that schools should be doing the public more good by paying student tuition in a manner similar to Berea. Anthony Marx, president of Amherst College, claims that his school has considered it, but it doesn’t make much sense seeing as most of his students already come from affluent parents who can pay, which seems like a bit of circular logic on his part.

The big endowment schools are providing more grants to low and middle-class students. With endowments in the tens of billions people are pushing for more money to enter the public sphere. Congress is even looking to impose a law forcing schools with over half a billion dollars to spend five percent of their assets.

Lewin also mentions a proposal in Massachusetts to impose a 2.5 percent tax on schools with endowments more than $1 billion. I’m guessing Massachusetts intends to redistribute the money to grants for students, something 75 percent of Americans support, according to "Squeeze Play." But will this help people? Will it help the schools? And what’s going to become of the endowments, especially when Wall Street has taken so much of their growth away?

In his book Tuition Rising, Ronald Ehrenberg discusses how schools tended to spend only about four percent of their endowment on average over a 40-year period. When one considers the rise of tuition combined with inflation, four percent seems like an insult. But the picture is more complicated when looking at the details.

Much of these large endowments are invested in the market, and the market doesn’t always perform well; there were years with negative returns. On the average though, moderate investment strategies returned nearly 10 percent. So what happened to the other six percent? Well, about four to five percent of it needs to be reinvested to protect against inflation and maintain purchasing power. Other bits of the endowment’s success are sucked up by administration costs involved with tracking money and investments and writing reports.

In order to provide more low cost, or no cost, education, well-endowed schools could buckle to pressure that outside forces are putting on them to spend more of their money, but they risk financial solvency in the long term by doing so. Endowments may have grown tremendously in the past few years, but spending at the rate of growth could make for a mess down the line. The other option is to give up more amenities, and go the way that schools such as Berea have.

The downside of this is that cutting costs would also mean giving up high-paid professors, fancy gyms and important research; the latter is argued as being almost as significant a public service as grants to students. Berea is an admirable example of a school doing a public good, but it is just one of many models of spending. Perhaps not something every school can live up to.