House Panel Questions College Endowment Spending, Tax Benefits

  • Republican Rep. Tom Reed says he's drafting legislation
  • One idea is for schools to use earnings for tuition costs

The campus of Swarthmore College, in Swarthmore, Pennsylvania.

Photographer: Charles Fox/The Philadelphia Inquirer via AP Photo

The wealthiest college endowments in the U.S. are again attracting the interest of Congress as tuition costs rise and the funds’ coffers grow to record highs unhindered by taxes.

Representative Tom Reed, a New York Republican, said Wednesday in a hearing of the House Ways and Means subcommittee that he was drafting legislation that would “deal with what I believe is a crisis when it comes to higher education costs in America.”

The cost of college has been rising faster than inflation for decades, and members of Congress are scrutinizing endowments as positive returns have enabled the wealthiest universities to return to pre-financial crisis levels. Taxing investment returns or requiring annual outlays, which have been repeatedly suggested by Congress, is an especially costly and complicated proposition for the almost 100 universities with endowments of at least $1 billion.

“We’re taking a very close look and I see some opportunity for reform that will benefit actual kids,” Reed, who has two children in high school and will be facing college bills himself soon, said in an interview.

His proposed legislation would mandate that colleges allocate investment earnings to tuition relief as a condition of tax-free status for the endowments. He suggested that wealthy universities such as Yale University and Harvard University, whose investment management firms can earn billions in returns annually, also distribute the unused excess to other institutions.

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Endowments are also a topic of interest for Illinois Republican Representative Peter Roskam, the chairman of the subcommittee that held the hearing, and other committee members, said Michael Shapiro, a spokesman for Roskam.

“This is the beginning of an ongoing body of work and further dialogue. We certainly expect more action in the future,” Shapiro said.

Georgetown University law professor Brian Galle, whose specialty includes taxation and nonprofit organizations, proposed in his testimony that Congress should consider tax rules that offer incentives to donors rather than mandating a spend rate or taxing investment returns. Currently, donors can reduce income and estate taxes by making a restricted gift while they are alive and they don’t have to pay taxes on any appreciation.

Wednesday’s hearing isn’t the first time that mega college endowments have attracted the attention of Congress.

Last year, David Camp, the former chairman of the House Ways and Means Committee, proposed a 1 percent excise tax on the net investment income of universities with endowments that have at least $100,000 per student. Camp has since retired.

Endowment Growth

Before the financial crisis, Charles Grassley, the Republican senator from Iowa, in a Senate finance committee hearing in September 2007, said he was concerned about endowment growth as college tuition continued to rise. Grassley later raised the idea that college endowments should pay out 5 percent of their value each year, using the same rule as foundations.

Several of the wealthiest U.S. colleges in 2007 and 2008 changed their financial aid policies, awarding grants that don’t need to be repaid instead of loans. Among the schools that adopted the so-called “no-loan” polices were all of the Ivy League, Swarthmore College and Pomona College. Princeton University had the policy years before.

Don Heller, dean of the college of education at Michigan State University, said in an interview he isn’t surprised that Congress is again interested in endowments. However, requiring universities to spend a portion on their endowments on a specific area can be tricky, as much of the funds are restricted, he said. In addition, schools would be concerned about fundraising if Congress began to restrict how money could be spent.

“You would see immediate push-back because of the tax implication,” Heller
said. “It could reduce future donations.”

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