Photographer: Michael Nagle/Bloomberg
Wall Street Is Making Even More Billionaires of U.S. Colleges
American universities are the richest they’ve ever been, with more schools than ever sitting on endowments valued at $1 billion.
From 2009 to 2016, the number of institutions hitting the 10-figure mark increased from 55 to as many as 90. As the year ends, the bull market promises to deliver additional billion-dollar endowments, given that investment returns averaged 13.2 percent for the year ended June 30. Ivy League stalwarts such as Dartmouth College and Cornell University are being joined by newcomers including the University of Arkansas and Virginia Tech. Some of these recent arrivals are already focused on bigger numbers in the years to come.
So with all this money sloshing around, some are wondering if students facing a future filled with debt should be getting more help. In particular, consumer advocates and politicians have asked why more endowment money isn’t going toward making college more affordable. Hearings were held in 2016 on Capitol Hill as endowment values hit record levels, and inquiries were sent to the richest 56 private colleges—those with funds over the magic $1 billion mark. More than a year later, the Republican-controlled Congress has passed a tax bill that includes a new levy on endowment investment gains.
Universities contend that, while much of their endowment wealth is earmarked by donors, they do use those funds to provide discounted tuition to low- and middle-income families. Ivy League schools in particular point to statistics showing high levels of financial aid and relatively low levels of debt among their students. The new tax will damage that effort, wrote John Coatsworth, a provost at Columbia University in New York, and Lee Goldman, chief executive of its medical center.
“Such a tax on endowment earnings would reduce resources available for student financial aid, faculty salaries and other critical needs,” they warned in a joint letter to the Ivy League school’s community. Arguing against the tax may be missing the point when it comes to defending fat endowments, however. With parents these days starting college funds before kindergarten even starts, the optics of a $1 billion endowment run by high-paid administrators aren’t favorable for higher education. “They’re under a pretty intense amount of pressure, and they haven’t done a lot to get in front of it,” said Andy Rotherham, co-founder and partner of Bellwether Education Partners, a nonprofit that awards grants to improve education at all levels. “They don’t generate a lot of sympathy.”
Stellar endowment performance for the year ending in June was led by schools heavily invested in stocks. Institutions with complex investment strategies such as Yale University, which puts more than half of its assets in alternatives such as private equity and hedge funds, generally did poorer. Tiffany Jones, director of higher education policy at the Education Trust, said most endowment wealth is concentrated in just a few schools. Some 3 percent of colleges hold 75 percent of all endowment wealth, she said, while half of all colleges with endowments above $500 million come up short in enrolling first-time Pell Grant recipients, a need-based grant.
“These wealthy institutions need to enroll and support many more of the students who face the greatest barriers,” she said.
Meanwhile, tuition at private non-profit universities this academic year was more than double what it was 30 years ago, according to the College Board, adjusting for inflation. And in 2015, the most recent year for which data is available, 58 college presidents were being paid more than $1 million. The people who run the endowments are also cashing in. In 2015, Stephen Blyth, then chief executive of Harvard University’s endowment, was making $15 million, according to tax filings. Blyth didn’t return a request for comment. Harvard declined to comment.
“It certainly raises eyebrows,” said Dan Bauman, a data reporter with the Chronicle of Higher Education.
Experts estimate there’s roughly $1.3 trillion of student debt outstanding, more than triple what was owed a decade ago, according to New York Fed data. The burden of repaying it, which exceeds credit card balances and auto loans, has been blamed for broad social and economic malaise, including delayed marriages and homebuying. It also disproportionately impacts minorities.
Given this stark picture, “you have a lot of people arguing that the pay for presidents is out of line for someone in a nonprofit education role,” Bauman said. But can the same be said for burgeoning endowments?
Made up primarily of donations and investment income, endowments are fueled by a culture of philanthropy, aggressive investment strategies and tax breaks for donors. The idea of a multibillion-dollar endowment has its roots in the aftermath of World War II. Years after veterans flooded colleges, thanks to the G.I. Bill, the more successful among them began to give back. By 1962, Harvard was getting close to the $1 billion mark.
As the generosity added up, administrators began sticking assets into essentially yield-less treasury bills and investment-grade corporate bonds. In 1969, a study funded by the Ford Foundation questioned that model, asking whether universities were squandering a tremendous source of capital. By the mid-1970s, schools were dipping into equities. Hedge fund investing started in the 1980s and, by the end of that decade, colleges were partnering with private equity funds. In 2007, as many as 72 schools had more than $1 billion, but the recession that followed drove that number down. By 2016, about 800 U.S. universities combined for more than a half-trillion dollars in endowment assets, according to an industry survey.
So why don’t colleges use more of that money to lower tuition? Spending down an endowment isn’t as simple as making a withdrawal, said Rotherham. “So much money is restricted, and people don’t really appreciate this,” he said. “You can’t just turn around and spend it wherever you want.”
Many major donors insist their funds be used for specific purposes. Others don’t even give money. Princeton University, for example, would struggle to convert the largest gift in its history into tuition assistance: a collection of 2,500 rare books valued at almost $300 million. Princeton, whose endowment hit a record of $23.8 billion in the last fiscal year, said it has allocated $200 million from the fund over the next few years to build more facilities, including dorms.
Yale said endowment spending at the New Haven, Connecticut, university last year exceeded the investment return. The value of its fund fell from $25.6 billion in 2015 to $25.4 billion in 2016, spokesman Tom Conroy said. “Yale spends significant endowment funds,” he said. “The endowment provides a third of Yale’s revenue, while net tuition and fees is less than 10 percent. The endowment, of course, supports many purposes in addition to financial aid.”
There is an effort to free up more endowment money to help students. A “no-loan” trend for those with financial need has emerged, said Ken Redd, senior director for research and policy analysis at the National Association of College and University Budget Officers. For families with too much income to qualify for aid, but not enough to pay $60,000 in annual college costs, schools such as Princeton and Harvard have replaced federally subsidized loans with grants paid for by their endowments, annual giving and richer students who pay full price, Redd said.
At Dartmouth, spokeswoman Amy Olson said, the “endowment plays a critical role in funding our priority of meeting 100 percent of the demonstrated financial need of every undergraduate student.”
As Wall Street drives the stock market ever-higher, a new class of universities has joined the billionaire club. Amanita Duga-Carroll, a spokeswoman for Vassar College, said the Poughkeepsie, New York, school crossed the finish line this year thanks to double digit investment returns. At the University of Maryland, similar good news helped the College Park research institution achieve the mark. But these freshmen aren’t planning to rest on their laurels.
“Our sights are set on much bigger growth in the coming years,” said Bill Wojcik, chief operating officer of UMD’s foundation.
Virginia Tech, which also reached $1 billion this year, is aiming to hit $1.6 billion by 2022, said John Dooley, CEO of the Blacksburg school’s foundation. A $120 million gift from the Walton family, of Wal-Mart Stores Inc. fame, pushed the University of Arkansas into 10 figures this year. Mark Power, vice chancellor for university advancement at the Fayetteville-based school, said the milestone was “huge.”
“We’ve been so focused on getting our endowment to $1 billion,” Power said. “We haven’t officially set the next goal yet, but it’ll be $1.5 billion, then $2 billion. I’d hope to hit that first one over the next five to 10 years.” Power added that the university was “committed to providing a low-cost, quality education,” but noted that “with inflation and cost pressures, total operating expenses will likely continue to rise.”