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Thursday, October 16, 2008

Are Universities Overly Endowed?

Are Universities Overly Endowed?

In his opinion piece in the Los Angeles Times, Senator Charles Grassley of Iowa discusses the use of college endowments in the wake of increasing costs for higher education. College endowments have enjoyed high growths and college tuitions have steadily increased. 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; and Stanford University’s endowment by 21.9% to $17.2 billion. At the same time, tuition has increased by double digits every five years over the last two decades, according to the College Board.

Senator Grassley asked experts “why colleges can't draw on their bulging endowments to increase student aid or forgo tuition increases?” Some explanation as to why colleges shouldn’t use their endowments were: budget cuts by the state are making public institution fund operations on their own; donors decide how donation should be used; and it costs more than the tuition to educate a student so colleges are subsidizing higher education.

So just how are college endowments being used and how does this effect you? It all comes down to taxes. Universities are exempt from paying federal income tax on their operating income, they don’t have to pay tax on their endowment investment income, and donations to the colleges are tax deductable. These tax incentives were put into place so that universities would be able to fulfill their charitable purpose of educating students. Senator Grassley suggests that congress should place a tax on university endowments if it exceeds a certain amount but wants to see colleges initiate self-correction on college affordability.

In an effort to keep higher education affordable, should congress consider imposing a tax on high university endowments?

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M said...

I think this is a very difficult question-- the proposition of imposing taxes always is. Perhaps instead, there should be a tax on endowment funds that are used for frivolous things; anything that doesn't directly contribute to the quality of education for students, which includes funding for departmental research, improving educational settings ("smartening" classrooms, refurbishing theatres, etc), providing scholarships for students, and providing materials for departments (such as lab materials, or displays for specific courses). Emory University, for one, has an enormous endowment that goes solely towards landscaping as does Rhodes College. If we only tax funds that go towards re-doing the campus ever three weeks, then perhaps donors will be encouraged to earmark their money for departmental use or scholarship funds (which need to be created or more well-advertised).

Jostm09 said...

The people allocating university funds are likely highly quailfied and with long experience with the individual institution. They have the highest probability of making the best related decisions, without help from legislation.

Unknown said...

i'd like help thinking this through. i went to a college that has a huge endowment. they also have huge expenses that are very legitimate -- maintaining old buildings, first class library and research material etc. i'm certain they are not wasting the money. but every time i write a check for say $100 (which i dedicate to the library system) i feel guilty giving that money to an institution with hundreds or millions in the bank, rather than giving my $100 to a charity that helps the truly needy and has far more limited resources. any thoughts or advice?

M said...


In my experience, most colleges have endowments specifically for buildings like that, however perhaps you can ask the next time you give if the library has existing funding and if your money is needed. I always support a good library, but if it's something that's gnawing at your conscience, perhaps knowing for sure that you're doing something that matters (because what's more noble than the pursuit of knowledge?) will calm your guilt. Though there are non profits out there that can use the money, as long as you're doing something you want to do with it, I see no reason to be ashamed in assisting!